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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-7674
First Financial Bankshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Texas 75-0944023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 Pine Street
Abilene, Texas 79601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (915) 627-7155
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 5, 1999, the aggregate market value of voting stock held by
non-affiliates was $279,250,016.
As of March 5, 1999, there were 9,953,683 shares of Common Stock
outstanding.
Documents Incorporated by Reference
The Proxy Statement for the 1999 Annual Meeting is incorporated into Part
III of this Form 10-K by reference.
TABLE OF CONTENTS
Page
----
FORWARD-LOOKINGSTATEMENTS......................................................1
PART I
ITEM 1. BUSINESS........................................................1
ITEM 2. PROPERTIES.....................................................10
ITEM 3. LEGAL PROCEEDINGS..............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................10
ITEM 6. SELECTED FINANCIAL DATA........................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............24
ITEM 11. EXECUTIVE COMPENSATION.........................................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................24
SIGNATURES
-i-
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). When used in this Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
and similar expressions, as they relate to First Financial Bankshares, Inc.
("Bankshares" or the "Company") or its management, identify forward-looking
statements. These forward-looking statements are based on information currently
available to Bankshares' management. Actual results could differ materially from
those contemplated by the forward-looking statements as a result of certain
factors, including but not limited to general economic conditions, actions taken
by the Federal Reserve Board (as defined below), legislative and regulatory
actions and reforms, competition and other factors described in "PART II, Item 7
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements reflect the current views of Bankshares' management
with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to the operations, results of operations,
growth strategy and liquidity of Bankshares. All subsequent written and oral
forward-looking statements attributable to Bankshares or persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
General
- -------
First Financial Bankshares, Inc., a Texas corporation, is a multibank
holding company registered under the Bank Holding Company Act of 1956 (the
"BHCA"). As such, Bankshares is supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Bankshares was formed in
1956 under the original name F & M Operating Company. By virtue of a series of
reorganizations, mergers, and acquisitions since 1956, Bankshares now owns,
through its wholly-owned Delaware subsidiary, First Financial Bankshares of
Delaware, Inc., nine banks organized and located in Texas. These nine banks are
First National Bank of Abilene, Abilene, Texas; Hereford State Bank, Hereford,
Texas; First National Bank, Sweetwater, Texas; Eastland National Bank, Eastland,
Texas; The First National Bank in Cleburne, Cleburne, Texas; Stephenville Bank
and Trust Co., Stephenville, Texas; San Angelo National Bank, San Angelo, Texas;
Weatherford National Bank, Weatherford, Texas; and Texas National Bank,
Southlake, Texas (collectively, the "First Financial Banks").
Bankshares' service centers are located primarily in North Central and West
Texas. Considering the branches and locations of all First Financial Banks, as
of December 31, 1998, Bankshares had 26 financial centers across Texas, with six
locations in Abilene, four locations in Cleburne, two locations in Stephenville,
two locations in San Angelo, three locations in Weatherford, and one location
each in Hereford, Sweetwater, Eastland, Southlake, Alvarado, Burleson, Trophy
Club, and Roby.
First Financial Bankshares, Inc.
- --------------------------------
Bankshares provides management and technical resources and policy direction
to the First Financial Banks, which enables them to improve or expand their
banking services while continuing their local activity and identity. Each of the
First Financial Banks operates under the day-to-day management of its board of
directors and officers, with substantial authority in making decisions
concerning their own investments, loan policies, interest rates, and service
charges. Bankshares provides resources and policy direction in, among other
things, the following areas: (i) asset and liability management; (ii)
accounting, budgeting, planning and insurance; (iii) capitalization; and (iv)
regulatory compliance. In particular, Bankshares assists its banks with, among
other things, decisions concerning major capital expenditures, employee fringe
benefits, including pension plans and group insurance, dividend policies, and
appointment of officers and directors and their compensation. Bankshares also
performs, through corporate staff groups or by outsourcing to third parties,
internal audits and loan reviews of its banks. Bankshares, through First
National Bank of Abilene, provides advice to and specialized services for its
banks related to lending, investing, purchasing, advertising, public relations,
and computer services.
Services Offered by the First Financial Banks
- ---------------------------------------------
Each of the First Financial Banks is a separate entity that operates under
the day-to-day management of its own board of directors and officers. Each First
Financial Bank provides general commercial banking services, which include
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accepting and holding checking, savings and time deposits, making loans
(including credit card services), automated teller machines, drive-in and night
deposit services, safe deposit facilities, transmitting funds, and performing
other customary commercial banking services. The First Financial Banks also
administer pension plans, profit sharing plans and other employee benefit plans,
act as stock transfer agents or stock registrars for corporations, and provide
paying agent services. First National Bank of Abilene, First National Bank,
Sweetwater, Stephenville Bank and Trust Co. and San Angelo National Bank have
active trust departments. The trust departments offer a complete range of
services to individuals, associations, and corporations. These services include
administering estates, testamentary trusts, various types of living trusts, and
agency accounts. In addition, First National Bank of Abilene, First National
Bank in Cleburne, and San Angelo National Bank provide securities brokerage
services through arrangements with various third parties.
Recent Developments
- -------------------
In December 1998, pursuant to a Stock Exchange Agreement and Plan of
Reorganization, dated as of September 4, 1998, between Bankshares and Cleburne
State Bank ("Cleburne"), as amended, Bankshares acquired Cleburne by exchanging
411,683 shares of its common stock for 99.3% of the outstanding shares of
Cleburne common stock. Each Cleburne shareholder received 2.1073 shares of
Bankshares common stock for each share of Cleburne common stock owned and cash
in lieu of fractional shares. The total consideration paid by Bankshares for the
Cleburne common stock tendered in exchange for Bankshares' common stock was
$14,823,000, including the cash paid in lieu of fractional shares of Bankshares'
stock. Cleburne operates two full-service locations, one in Cleburne, Texas, and
one in nearby Alvarado, Texas, which locations are within 25 miles of Fort
Worth, Texas, and should be considered part of the Fort Worth banking market.
Cleburne provides a full range of both commercial and consumer banking services,
including loans, checking accounts, savings programs, safe deposit facilities,
access to automated teller machines, and credit card programs. Cleburne does not
offer trust services. As of November 30, 1998, Cleburne had assets totaling
$85,700,000 and shareholders' equity of $7,278,000. On March 5, 1999, Bankshares
merged Cleburne with and into The First National Bank in Cleburne, a subsidiary
bank of Bankshares, in accordance with applicable law.
Competition
- -----------
Commercial banking in Texas is highly competitive, and Bankshares, holding
less than 1% of deposits, represents only a minor segment of the industry. To
succeed in this industry, Management believes that banks must have the
capability to compete in the areas of (i) interest rates paid or charged; (ii)
scope of services offered, and (iii) prices charged for such services. The First
Financial Banks compete in their respective service areas against highly
competitive banks, savings and loan associations, small loan companies, credit
unions, and brokerage firms, all of which are engaged in providing financial
products and services and some of which are larger than the First Financial
Banks in terms of capital, resources and personnel.
Bankshares' business does not depend on any single customer or any few
customers, the loss of any one of which would have a materially adverse effect
upon the business of Bankshares. Customers of Bankshares and its banks include
their officers and directors, as well as other entities with which they are
affiliated. Bankshares and its banks may make loans to officers and directors,
and entities with which they are affiliated, in the ordinary course of business.
Bankshares and its banks make such loans on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons. Loans to directors, officers and
their affiliates are also subject to certain restrictions under federal and
state banking laws.
Employees
- ---------
Bankshares and its banks employed approximately 730 full-time equivalent
employees at March 1, 1999. Management believes that its employee relations have
been and will continue to be good.
Supervision and Regulation
- --------------------------
Both federal and state laws extensively regulate bank holding companies and
banks. These laws (and the regulations promulgated thereunder) are primarily
intended to protect depositors and the deposit insurance fund of the Federal
Deposit Insurance Corporation (the "FDIC"), although shareholders are also
benefited. The following information describes particular laws and regulatory
provisions relating to bank holding companies and banks. This discussion is
qualified in its entirety by reference to the particular laws and regulatory
provisions. A change in any of these laws or regulations may have a material
effect on the business of Bankshares and its banks.
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Bank Holding Companies
Because Bankshares is a bank holding company, it is subject to regulation
under the BHCA and its examination and reporting requirements. The BHCA provides
that bank holding companies may not:
(1) engage in any activities other than banking, managing and controlling
banks, furnishing services to a bank that it owns and controls, or engaging in
certain activities closely related to banking. Examples of activities that the
Federal Reserve Board has determined to be closely related to banking, or to
managing or controlling banks, include: (i) the making or acquiring of loans or
other extensions of credit; (ii) servicing of loans; (iii) performing certain
trust functions; (iv) acting or serving as an investment or financial advisor;
(v) providing certain securities brokerage services as agent for customers; and
(vi) providing bookkeeping and data processing services for a bank holding
company and its subsidiaries; or
(2) (subject to certain limited exceptions) directly or indirectly acquire
the ownership or control of more than five percent (5%) of any class of voting
shares or assets of any company, including a bank, without the prior written
approval of the Federal Reserve Board.
The BHCA provides that the Federal Reserve Board shall not approve any
acquisition, merger or consolidation that may (i) substantially lessen
competition in the banking industry, (ii) create a monopoly in any section of
the country, or (iii) be a restraint of trade. However, the Federal Reserve
Board may approve such a transaction if the convenience and needs of the
community clearly outweigh any anti-competitive effects. Specifically, the
Federal Reserve Board would consider, among other factors, the expected benefits
to the public (greater convenience, increased competition, greater efficiency,
etc.) against the risks of possible adverse effects (undue concentration of
resources, decreased or unfair competition, conflicts of interest, unsound
banking practices, etc.). Also, see "--Supervision and Regulation--Capital" for
discussion of capital requirements of bank holding companies and "--Bankshares'
Support of the First Financial Banks" for discussion of support requirements of
bank holding companies.
Banks
Federal and state laws and regulations that govern banks have the effect
of, among other things, regulating the scope of business, investments, cash
reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking
associations under the National Bank Act are subject to regulation and
examination by the Office of the Comptroller of the Currency (the "OCC"). The
OCC supervises, regulates and regularly examines the First National Bank of
Abilene, First National Bank, Sweetwater, The First National Bank in Cleburne,
Eastland National Bank, San Angelo National Bank, Weatherford National Bank and
Texas National Bank, all of which were chartered under the National Bank Act.
The OCC's supervision and regulation of banks is primarily intended to protect
the interests of depositors. The National Bank Act (i) requires each national
banking association to maintain reserves against deposits, (ii) restricts the
nature and amount of loans that may be made and the interest that may be
charged, and (iii) restricts investments and other activities.
State Banks. Banks that are organized as state banks under the Texas
Finance Code (formerly the Texas Banking Code) are subject to regulation and
examination by the Banking Commissioner of the State of Texas (the
"Commissioner"). The Commissioner regulates and supervises, and the Texas
Banking Department regularly examines, Hereford State Bank and Stephenville Bank
and Trust Co., which were chartered under the Texas Banking Code. The
Commissioner's supervision and regulation of banks is primarily designed to
protect the interests of depositors. The Texas Finance Code (i) requires each
state bank to maintain reserves against deposits, (ii) restricts the nature and
amount of loans that may be made and the interest that may be charged, and (iii)
restricts investments and other activities.
See "--Supervision and Regulation--Payment of Dividends" for discussion of
restrictions on a bank's ability to pay dividends and "--Supervision and
Regulation--Capital" for discussion of capital requirements of banks.
Deposit Insurance
Each First Financial Bank is a member of the FDIC. The FDIC provides
deposit insurance protection that covers all deposit accounts in FDIC-insured
depository institutions and that does not exceed $100,000 per account. The First
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Financial Banks must pay assessments to the FDIC under a risk-based assessment
system for federal deposit insurance protection. FDIC-insured depository
institutions that are members of the Bank Insurance Fund pay insurance premiums
at rates based on their risk classification. Institutions assigned to higher
risk classifications (i.e., institutions that pose a greater risk of loss to
their respective deposit insurance funds) pay assessments at higher rates than
institutions that pose a lower risk. An institution's risk classification is
assigned based on its capital levels and the level of supervisory concern the
institution poses to bank regulators. In addition, the FDIC can impose special
assessments to cover the costs of borrowings from the U.S. Treasury, the Federal
Financing Bank and the Bank Insurance Fund member banks. As of December 31,
1998, the assessment rate for each of the First Financial Banks is at the lowest
level risk-based premium available.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (the "FIRREA"), an FDIC-insured depository institution can be held liable
for any losses incurred by the FDIC in connection with (i) the "default" of one
of its FDIC-insured subsidiaries or (ii) any assistance provided by the FDIC to
one of its FDIC-insured subsidiaries "in danger of default." "Default" is
defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance.
The Federal Deposit Insurance Act (the "FDIA") requires that the FDIC
review (i) any merger or consolidation by or with an insured bank, or (ii) any
establishment of branches by an insured bank. The FDIC is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also
required before an insured bank retires any part of its common or preferred
stock, or any capital notes or debentures. Insured banks that are also members
of the Federal Reserve System, however, are regulated with respect to the
foregoing matters by the Federal Reserve System.
Payment of Dividends
Bankshares is a legal entity separate and distinct from its banking and
other subsidiaries. Bankshares receives most of its revenues from dividends paid
to it by its Delaware holding company subsidiary. Similarly, the Delaware
holding company subsidiary receives dividends from its bank subsidiaries.
Described below are some of the laws and regulations that apply when the
subsidiary banks and Bankshares pay dividends.
Each state bank that is a member of the Federal Reserve System and each
national banking association is required by federal law to obtain the prior
approval of the Federal Reserve Board and the OCC, respectively, to declare and
pay dividends if the total of all dividends declared in any calendar year would
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) its retained net profits (as defined and
interpreted by regulation) for the preceding two calendar years, less any
required transfers to surplus. In addition, these banks may only pay dividends
to the extent that retained net profits (including the portion transferred to
surplus) exceed bad debts (as defined by regulation).
The First Financial Banks paid aggregate dividends of approximately $15.5
million in 1998 and approximately $16.3 million in 1997. Under the dividend
restrictions discussed above, as of December 31, 1998, the First Financial
Banks, without obtaining governmental approvals, could have declared in the
aggregate additional dividends of approximately $13.8 million from retained net
profits.
To pay dividends, Bankshares and its banks also must maintain adequate
capital above regulatory guidelines. In addition, if the applicable regulatory
authority believes that a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The Federal Reserve Board and the OCC have each indicated that paying
dividends that deplete a bank's capital base to an inadequate level would be an
unsafe and unsound banking practice. The Federal Reserve Board, the OCC and the
FDIC have issued policy statements that recommend that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings.
Affiliate Transactions
The Federal Reserve Act and the FDIA restrict the extent to which
Bankshares can borrow or otherwise obtain credit from, or engage in certain
other transactions with, its depository subsidiaries. These laws regulate
"covered transactions" between insured depository institutions and their
subsidiaries, on the one hand, and their nondepository affiliates, on the other
hand. "Covered transactions" include a loan or extension of credit to a
nondepository affiliate, a purchase of securities issued by such an affiliate, a
purchase of assets from such an affiliate (unless otherwise exempted by the
4
Federal Reserve Board), an acceptance of securities issued by such an affiliate
as collateral for a loan, and an issuance of a guarantee, acceptance, or letter
of credit for the benefit of such an affiliate. The "covered transactions" that
an insured depository institution and its subsidiaries are permitted to engage
in with their nondepository affiliates are limited to the following amounts: (i)
in the case of any one such affiliate, the aggregate amount of "covered
transactions" cannot exceed ten percent (10%) of the capital stock and the
surplus of the insured depository institution; and (ii) in the case of all
affiliates, the aggregate amount of "covered transactions" cannot exceed twenty
percent (20%) of the capital stock and surplus of the insured depository
institution. In addition, extensions of credit that constitute "covered
transactions" must be collateralized in prescribed amounts. Further, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
Capital
Bank Holding Companies. The Federal Reserve Board has adopted risk-based
capital guidelines for bank holding companies. The ratio of total capital
("Total Capital") to risk weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) must be a minimum of eight
percent (8%). At least half of the Total Capital is to be composed of common
shareholders' equity, minority interests in the equity accounts of consolidated
subsidiaries and a limited amount of perpetual preferred stock, less goodwill
("Tier 1 Capital"). The remainder of Total Capital may consist of subordinated
debt, other preferred stock and a limited amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. Bank holding companies that meet
certain specified criteria, including having the highest regulatory rating, must
maintain a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average
assets for the current quarter, less goodwill) of three percent (3%). Bank
holding companies that do not have the highest regulatory rating will generally
be required to maintain a higher Tier 1 Capital leverage ratio of three percent
(3%) plus an additional cushion of 100 to 200 basis points. The Federal Reserve
Board has not advised Bankshares of any specific minimum leverage ratio
applicable to it. The guidelines also provide that bank holding companies
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions. Such strong capital positions must be kept
substantially above the minimum supervisory levels without significant reliance
on intangible assets (e.g., goodwill, core deposit intangibles and purchased
mortgage servicing rights). As of December 31, 1998, the capital ratios for
Bankshares were as follows: (1) Tier 1 Capital to Risk-Weighted Assets Ratio,
16.03%; (2) Total Capital to Risk-Weighted Assets Ratio, 17.01%; and (3) Tier 1
Capital Leverage Ratio, 9.02%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991
(the "FDICIA") established five capital tiers with respect to depository
institutions: "well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution's capital tier will depend upon where its capital levels
are in relation to various relevant capital measures, including (i) risk-based
capital measures, (ii) a leverage ratio capital measure and (iii) certain other
factors. Regulations establishing the specific capital tiers provide that a
"well-capitalized" institution will have a total risk-based capital ratio of ten
percent (10%) or greater, a Tier 1 risk-based capital ratio of six percent (6%)
or greater, and a Tier 1 leverage ratio of five percent (5%) or greater, and not
be subject to any written regulatory enforcement agreement, order, capital
directive or prompt corrective action derivative. For an institution to be
"adequately capitalized", it will have a total risk-based capital ratio of eight
percent (8%) or greater, a Tier 1 risk-based capital ratio of four percent (4%)
or greater, and a Tier 1 leverage ratio of four percent (4%) or greater (in some
cases three percent (3%)). For an institution to be "undercapitalized," it will
have a total risk-based capital ratio that is less than eight percent (8%), a
Tier 1 risk-based capital ratio less than four percent (4%) or a Tier 1 leverage
ratio less than four percent (4%) (or a leverage ratio less than three percent
(3%) if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). For an
institution to be "significantly undercapitalized," it will have a total
risk-based capital ratio less than six percent (6%), a Tier 1 risk-based capital
ratio less than three percent (3%), or a Tier 1 leverage ratio less than three
percent (3%). For an institution to be "critically undercapitalized," it will
have a ratio of tangible equity to total assets equal to or less than two
percent (2%). The FDICIA requires federal banking agencies to take "prompt
corrective action" against depository institutions that do not meet minimum
capital requirements. Under current regulations, the First Financial Banks were
"well capitalized" as of December 31, 1998.
The FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
"undercapitalized." An "undercapitalized" institution must develop a capital
restoration plan and its parent holding company must guarantee that
institution's compliance with such plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of five percent (5%)
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of the institution's assets at the time it became "undercapitalized" or the
amount needed to bring the institution into compliance with all capital
standards. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parent's general unsecured
creditors. If a depository institution fails to submit an acceptable capital
restoration plan, it shall be treated as if it is significantly
undercapitalized. "Significantly undercapitalized" depository institutions may
be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become "adequately capitalized," requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the appointment
of a receiver or conservator. Finally, the FDICIA requires the various
regulatory agencies to set forth certain standards that do not relate to
capital. Such standards relate to the safety and soundness of operations and
management and to asset quality and executive compensation, and permit
regulatory action against a financial institution that does not meet such
standards.
If an insured bank fails to meet its capital guidelines, it may be subject
to a variety of other enforcement remedies, including a prohibition on the
taking of brokered deposits and the termination of deposit insurance by the
FDIC. Bank regulators continue to indicate their desire to raise capital
requirements beyond their current levels.
In addition to the FDICIA capital standards, Texas-chartered banks must
also comply with the capital requirements imposed by the Texas Banking
Department. Neither the Texas Finance Code nor its regulations specify any
minimum capital-to-assets ratio that must be maintained by a Texas-chartered
bank. Instead, the Texas Banking Department determines the appropriate ratio on
a bank by bank basis, considering factors such as the nature of a bank's
business, its total revenue, and the bank's total assets. As of December 31,
1998, all Texas-chartered banks owned by Bankshares exceeded the minimum ratios
applied to them.
Bankshares' Support of the First Financial Banks
Under Federal Reserve Board policy, Bankshares is expected to commit
resources to support each of its subsidiary banks. This support may be required
at times when, absent such Federal Reserve Board policy, Bankshares would not
otherwise be required to provide it. In addition, any loans by Bankshares to its
banks would be subordinate in right of payment to deposits and to certain other
indebtedness of its banks. In the event of a bank holding company's bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and be subject to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require the bank's
shareholders to pay the deficiency on a pro-rata basis. If any shareholder
refuses to pay the pro-rata assessment after three months notice, then the
bank's board of directors must sell an appropriate amount of such shareholder's
stock at a public auction to make up the deficiency. To the extent necessary, if
a deficiency in capital still exist and the bank refuses to go into liquidation,
then a receiver may be appointed to wind up the bank's affairs.
Interstate Banking and Branching Act
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Banking and Branching Act"), a bank holding company is
able to acquire banks in states other than its home state. Prior to September
29, 1995, federal law provided that the Federal Reserve Board could only approve
interstate acquisitions by bank holding companies that were specifically
authorized by the laws of the state in which the bank whose shares were to be
acquired was located.
The Interstate Banking and Branching Act also authorized banks to merge
across state lines, thereby creating interstate branches, beginning June 1,
1997. Under this act, each state had the opportunity to "opt out" of this
provision, thereby prohibiting interstate branching in such states, or to "opt
in" at an earlier time, thereby allowing interstate branching within that state
prior to June 1, 1997. Furthermore, pursuant to this act, a bank is now able to
open new branches in a state in which it does not already have banking
operations, if the laws of such state permit it to do so. Although Texas has
adopted legislation to "opt out" of the interstate branching provisions, which
legislation expires on September 2, 1999, recent judicial decisions have
invalidated this "opt-out" legislation. Both the OCC and the Texas Banking
Department are presently accepting applications for interstate merger and
branching transactions. The Texas Banking Department intends to submit proposed
legislation that would codify the judicial authority for interstate merger and
branching transactions to the Texas legislature during the 1999 legislative
session.
6
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977 (the "CRA") subjects a bank to
regulatory assessment to determine if the institution meets the credit needs of
its entire community, including low- and moderate-income neighborhoods served by
the bank, and to take that determination into account in its evaluation of any
application made by such bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition of shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. The First Financial Banks have taken significant actions to
comply with the CRA, and each has received at least a "satisfactory"
commendation in its most recent review by federal regulators with respect to its
compliance with the CRA. Both the United States Congress and the banking
regulatory authorities have proposed substantial changes to the CRA and fair
lending laws, rules and regulations, and there can be no certainty as to the
effect, if any, that any such changes would have on the First Financial Banks.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, that affect the national supply of credit.
The Federal Reserve Board regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial
institution deposits, and restricting certain borrowings by financial
institutions and their subsidiaries. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banks in
the past and are expected to continue to do so in the future.
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on Bankshares
and its banks cannot be determined at this time.
Statistical Disclosure
The following tables provide information required by the Exchange Act
Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" that has
not been included in "PART II, Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Composition of Loans (in thousands):
December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Commercial, financial and agricultural.. $ 278,647 $ 286,630 $ 240,271 $ 219,792 $ 183,929
Real estate - construction.............. 36,721 34,100 22,887 20,206 13,615
Real estate - mortgage.................. 198,447 177,658 152,350 131,801 141,227
Consumer................................ 265,729 245,068 189,307 164,231 135,709
----------- ----------- ----------- ----------- -----------
$ 779,544 $ 743,456 $ 604,815 $ 536,030 $ 474,480
=========== =========== =========== =========== ===========
Loan Concentrations
Other than the classifications shown above, Bankshares had no loans
outstanding at December 31, 1998 that represented more than 10% of total loans.
Maturity Distribution and Interest Sensitivity of Loans at December 31,
1998 (in thousands):
The following table summarize maturity and yield information for the
commercial, financial, and agricultural and real estate construction portion of
the loan portfolio as of December 31, 1998:
7
After One
Year
One Year Through After Five
or less Five years Years Total
----------- ------------ ----------- -----------
Commercial, financial, and agricultural... $ 180,693 $ 82,106 $ 15,848 $ 278,647
Real estate-- construction................ 28,387 8,334 -- 36,721
----------- ------------ ----------- -----------
$ 209,080 $ 90,440 $ 15,848 $ 315,368
=========== ============ =========== ===========
Maturities
After One Year
Loans with fixed interest rates.......................... $ 57,854
Loans with floating or adjustable interest rates......... 48,434
------------
$ 106,288
Potential Problem Loans
Certain loans classified for regulatory purposes as doubtful, substandard,
or special mention are included in the nonperforming loan table. Also included
in the classified loans are certain other loans that are deemed to be potential
problems. Potential problem loans are those loans that are currently performing
but where known information about trends or uncertainties or possible credit
problems of the borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with present repayment terms, possibly
resulting in the transfer of such loans to nonperforming status. These potential
problem loans totaled $399 thousand as of December 31, 1998.
Composition of Investment Securities (in thousands):
December 31, 1998 December 31, 1997 December 31, 1996
---------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- --------- ----------- -------- ----------- --------
Held-to-maturity at amortized cost
- ----------------------------------
U.S. Treasury obligations and
obligations of U.S. government
corporations and agencies............ $ 293,400 $ 297,080 $ 330,674 $332,389 $ 373,072 $373,793
Obligations of states and political
subdivisions......................... 66,764 67,731 34,456 34,796 25,798 25,825
Mortgage-backed securities.............. 44,634 44,894 59,809 59,995 77,089 76,573
Other securities........................ 9,505 9,547 10,958 11,189 14,096 14,146
----------- --------- ----------- -------- ----------- --------
Total.......................... $ 414,303 $ 419,252 $ 435,897 $438,369 $ 490,055 $490,337
=========== ========= =========== ======== =========== ========
Available-for-sale
- ------------------
U.S. Treasury obligations and
obligations of U.S. government
corporations and agencies............ $ 104,256 $ 105,368 $ 141,531 $141,784 $ 16,286 $ 16,249
Obligations of states and political
subdivisions......................... 33,255 33,863 8,168 8,408 1,300 1,292
Mortgage-backed securities.............. 42,579 42,795 27,036 27,164 32,092 31,910
Other securities........................ 29,143 29,562 2,767 2,766 1,752 1,752
----------- --------- ----------- -------- ----------- --------
Total.......................... $ 209,233 $ 211,588 $ 179,502 $180,122 $ 51,430 $ 51,203
=========== ========= =========== ======== =========== ========
8
Analysis of the Allowance for Loan Losses (in thousands, except percentages):
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
Balance at January 1,........................ $ 10,632 $ 9,797 $ 9,650 $ 9,769 $ 10,132
Allowance established from
purchase acquisition...................... -- 1,444 800 83 --
---------- ---------- ---------- ---------- ---------
10,632 11,241 10,450 9,852 10,132
Charge-offs:
Commercial, financial and agricultural.... 1,267 836 1,214 442 1,157
Consumer.................................. 2,786 2,127 1,476 730 627
All other................................. 106 164 74 20 28
---------- ---------- ---------- ---------- ---------
Total loans charged off...................... 4,159 3,127 2,764 1,192 1,812
Recoveries:
Commercial, financial and agricultural.... 532 726 389 393 1,954
Consumer.................................. 811 643 380 325 295
All other................................. 32 35 142 103 82
---------- ---------- ---------- ---------- ---------
Total recoveries............................. 1,375 1,404 911 821 2,331
---------- ---------- ---------- ---------- ---------
Net (recoveries)/charge-offs................. 2,784 1,723 1,853 371 (519)
Provision/(credit) for loan losses........... 1,140 1,114 1,200 169 (882)
---------- ---------- ---------- ---------- ---------
Balance at December 31,...................... $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
========== ========== ========== ========== =========
Loans at year-end............................ $ 779,544 $ 743,456 $ 604,815 $ 536,030 $ 474,480
Average loans................................ 770,183 657,325 575,658 493,831 457,461
Net charge-offs/(recoveries)/average loans... 0.36% 0.26% 0.32% 0.08% (0.11)%
Average for loan losses/year-end loans....... 1.15 1.43 1.62 1.80 2.06
Allowance for loan losses/nonperforming
loans..................................... 322.84 255.58 288.57 451.36 408.57
Allocation of Allowance for Loan Losses (in thousands):
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
----------- ----------- ----------- ----------- -----------
Commercial, financial and agricultural..... $ 3,212 $ 4,099 $ 3,892 $ 3,957 $ 3,786
Real estate - construction................. 423 488 370 364 280
Real estate - mortgage..................... 2,288 2,541 2,468 2,373 2,907
Consumer................................... 3,064 3,504 3,067 2,956 2,795
--------- --------- --------- --------- --------
Total................................. $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,768
========= ========= ========= ========= ========
Percent of Total Loans
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
Commercial, financial and agricultural.... 35.74% 38.55% 39.73% 41.00% 38.76%
Real estate - construction................ 4.71 4.59 3.78 3.77 2.87
Real estate - mortgage.................... 25.46 23.90 25.19 24.59 29.76
Consumer.................................. 34.09 32.96 31.30 30.64 28.61
Available Information
- ---------------------
Bankshares files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any document Bankshares files at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Bankshares' SEC filings are also available to the public at the SEC's web
site at http://www.sec.gov.
9
ITEM 2. PROPERTIES
The principal office of Bankshares is located in the First National Bank
Building at 400 Pine Street in downtown Abilene, Texas. Bankshares leases
approximately 2,300 square feet from First National Bank of Abilene, which owns
the building, pursuant to a lease agreement that expires December 31, 1999. The
First Financial Banks collectively own 30 banking facilities, some of which are
detached drive-ins, and leases four banking facilities. In 1999, Bankshares
intends to (i) make permanent improvements to an existing banking facility, (ii)
construct a new banking facility to replace a smaller, leased one, (iii) sell an
existing banking facility that is located near a facility acquired by Bankshares
in 1998, (iv) sell a banking facility acquired in 1998 that is located near an
existing banking facility, and (v) lease a new banking facility as a grocery
store branch. Bankshares anticipates that the net cost of these facility
projects will be funded with cash from operations and is not expected to be
material to Bankshares' future consolidated results of operations. Management
considers all of its existing locations to be quality facilities and well suited
for conducting the business of banking. Bankshares believes that its existing
facilities, along with its planned facilities for 1999, are adequate to meet its
and the First Financial Banks' requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Bankshares and its banks are parties to a number of lawsuits arising in the
ordinary course of its banking business. However, there are no material pending
legal proceedings to which Bankshares, the First Financial Banks or Bankshares'
other direct and indirect subsidiaries, or any of their properties, are subject.
Other than regular, routine examinations by state and federal banking
authorities, there are no proceedings pending or known to be contemplated by any
governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of Bankshares
during the fourth quarter of Bankshares' fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bankshares' common stock, par value $10.00 per share, is traded on the
Nasdaq National Market under the trading symbol FFIN. See "Item 8--Financial
Statements and Supplementary Data--Quarterly Financial Data" for the high, low
and closing sales prices as reported by the Nasdaq National Market for
Bankshares' common stock for the periods indicated. As of March 5, 1999,
Bankshares had 1,762 shareholders of record.
See "Item 8--Financial Statements and Supplementary Data--Quarterly
Financial Data" for the frequency and amount of cash dividends paid by
Bankshares. Also, see "PART I--Item 1--Business--Regulation and Supervision" for
restrictions on Bankshares' present or future ability to pay dividends.
10
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of Bankshares presented below as of December
31, 1998, 1997, 1996, 1995 and 1994, and for the years ended December 31, 1998,
1997, 1996, 1995 and 1994 have been derived from the audited consolidated
financial statements of Bankshares. The selected financial data should be read
in conjunction with "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Bankshares' consolidated financial
statements. The results of operations presented below are not necessarily
indicative of the results of operations that may be achieved in the future. The
amounts related to shares of Bankshares' common stock have been adjusted to give
effect to all stock dividends and stock splits.
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
Summary Income Statement Information:
Interest income $ 111,868 $ 101,474 $ 89,164 $ 79,165 $ 68,545
Interest expense 46,292 41,735 35,699 31,252 23,810
----------- ----------- ----------- ----------- -----------
Net interest income 65,576 59,739 53,465 47,913 44,735
Provision (credit) for loan losses 1,140 1,114 1,200 168 (882)
Noninterest income 22,351 19,486 16,491 15,686 12,913
Noninterest expense 52,422 46,522 39,829 36,460 36,611
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 34,365 31,589 28,927 26,971 21,919
Provision for income taxes 11,111 10,563 9,884 9,106 7,203
----------- ----------- ----------- ----------- -----------
Net earnings (1) $ 23,254 $ 21,026 $ 19,043 $ 17,865 $ 14,716
=========== =========== =========== =========== ===========
Per Share Data:
Net earnings per share $ 2.34 $ 2.12 $ 1.98 $ 1.87 $ 1.54
Net earnings per share,
assuming dilution 2.33 2.11 1.97 1.84 1.54
Cash dividends declared 1.00 0.88 0.79 0.71 0.64
Book value at period-end 17.03 15.56 14.20 13.06 11.83
Earnings performance ratios:
Return on average assets 1.44% 1.46% 1.51% 1.46% 1.32%
Return on average equity 14.51 14.37 14.72 13.91 13.49
Summary Balance Sheet Data (Period-end):
Investment securities $ 625,891 $ 616,018 $ 541,451 $ 508,769 $ 517,457
Loans 779,544 743,456 604,815 536,030 472,411
Total assets 1,686,647 1,657,044 1,332,645 1,190,769 1,129,054
Deposits 1,504,856 1,488,709 1,185,440 1,055,961 1,006,913
Total liabilities 1,517,198 1,502,583 1,196,236 1,066,392 1,015,993
Total shareholders' equity 169,449 154,461 136,409 124,377 113,061
Asset quality ratios:
Allowance for loan losses/
period-end loans 1.15% 1.43% 1.62% 1.80% 2.07%
Nonperforming assets/period-end
loans plus foreclosed assets 0.41 0.68 0.69 0.53 0.72
Net (recoveries) charge offs/
average loans 0.36 0.26 0.32 0.08 (0.11)
Capital ratios:
Leverage ratio (2) 9.02% 8.28% 10.27% 10.65% 10.11%
Tier 1 risk-based capital (3) 16.03 14.76 18.73 19.20 19.95
Total risk-based capital (4) 17.01 15.95 19.95 20.42 21.56
Dividend payout ratio 41.66 41.24 40.32 35.63 34.04
- --------------------------------
(1) Net earnings for the year ended December 31, 1995 includes $1.3
million, or $0.14 per share, in nonrecurring gains from sale of assets.
(2) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
fourth quarter average assets less intangible assets.
(3) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
risk-adjusted assets.
(4) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
plus allowance for loan losses to the extent allowed under regulatory
guidelines by risk-adjusted assets.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of the major elements of the Company's
consolidated balance sheets as of December 31, 1998 and 1997, and statements of
earnings for the years 1996 through 1998 should be reviewed in conjunction with
the consolidated financial statements, accompanying notes, and selected
financial data of the Company presented elsewhere in this Report. All amounts
and prices related to the Company's common stock have been adjusted to give
effect to all stock splits and stock dividends.
Acquisitions
Acquisition of Cleburne State Bank. On December 16, 1998, the Company
acquired Cleburne State Bank (the "Cleburne Acquisition") by issuing 411,683
shares of the Company's common stock in exchange for 99.3% of the outstanding
shares of common stock of Cleburne State Bank. This transaction was accounted
for as a pooling-of-interests, and accordingly, the Company's consolidated
financial data for prior periods has been restated. On March 5, 1999, Cleburne
State Bank was merged into its affiliate, The First National Bank in Cleburne.
Acquisition of Southlake Bancshares, Inc. On November 24, 1997, the Company
acquired Southlake Bancshares, Inc. and its subsidiary, Texas National Bank,
(the "Southlake Acquisition") by issuing 216,442 shares of the Company's common
stock in exchange for all of the outstanding shares of common stock of Southlake
Bancshares, Inc. This transaction was accounted for as a pooling-of-interests
but due to immateriality, the Company's consolidated financial data prior to
1997 was not restated.
Texas Commerce Bank-San Angelo. On September 25, 1997, the Company, through
a bank subsidiary, acquired certain assets of Texas Commerce Bank-San Angelo
(the "TCB-San Angelo Acquisition") for $16.8 million in cash and the assumption
of certain liabilities (primarily deposits). The transaction was accounted for
as a purchase, and accordingly, the results of operations were consolidated with
those of the Company from the date of acquisition. As a result, in 1997, the
Company recorded only three months of operations associated with these assets
and liabilities, whereas in 1998, the Company recorded twelve months of
operations. Effective January 1, 1998, and in connection with the TCB-San Angelo
Acquisition, all of the outstanding stock of Texas Commerce-San Angelo Trust
Company was transferred to the bank subsidiary. Texas Commerce-San Angelo Trust
Company was subsequently merged into the bank subsidiary which as of December
31, 1998, had trust assets of $95.8 million under management.
Results of Operations
Performance Summary. Net earnings for 1998 were $23.3 million, an increase
of $2.3 million, or 10.6%, over net earnings for 1997 of $21.0 million. Net
earnings for 1996 were $19.0 million. The increase in net earnings for both 1998
and 1997 was primarily attributable to an increase in net interest income
resulting primarily from the growth in average earning assets and an increase in
noninterest income resulting primarily from increases in service fees on deposit
accounts and trust fees.
On a per share basis, net earnings were $2.34 for 1998 as compared to $2.12
for 1997 and $1.98 for 1996. Return on average assets was 1.44% for 1998 as
compared to 1.46% for 1997 and 1.51% for 1996. Return on average equity was
14.51% for 1998 as compared to 14.37% for 1997 and 14.72% for 1996.
Net Interest Income. Net interest income is the difference between interest
income on earning assets and the interest expense on liabilities incurred to
fund those assets. The Company's earning assets consist primarily of loans and
securities. The Company's liabilities to fund those assets consist primarily of
interest-bearing deposits. Net interest income was $67.0 million in 1998 as
compared to $60.5 million in 1997 and $53.9 million in 1996. These increases
were primarily due to growth in the volume of earning assets. Average earning
assets were $1.470 billion in 1998, an increase of $162.0 million, or 12.4%, as
compared to $1.308 billion in 1997, which was $154.1 million, or 13.3%, higher
than 1996. The 1998 increase is due primarily to the TCB-San Angelo Acquisition
which accounted for approximately $112.0 million of such increase. For 1997, the
TCB-San Angelo and Southlake Acquisitions accounted for approximately $70.0
million of the growth in earning assets. Table 1 allocates the increases in
tax-equivalent net interest income for 1998 and 1997 between the amount of
increase attributable to volume and rate.
12
Table 1 -- Changes in Interest Income and Interest Expense (in thousands):
1998 Compared to 1997 1997 Compared to 1996
----------------------------------- -----------------------------------
Change Attributable to Total Change Attributable to Total
---------------------- ----------------------
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- --------
Short-term investments............... $ 822 $ (98) $ 724 $ 1,633 $ 30 $ 1,663
Taxable investment securities........ 238 (203) 35 1,646 1,044 2,690
Tax-exempt investment securities (1). 1,962 56 2,018 947 (15) 932
Loans (1)............................ 10,756 (2,438) 8,318 7,852 (552) 7,300
--------- --------- --------- --------- --------- --------
Interest income................... 13,778 (2,683) 11,095 12,078 507 12,585
--------- --------- --------- --------- --------- --------
Interest-bearing deposits............ 4,967 (447) 4,520 4,738 1,220 5,958
Short-term borrowings................ 41 (1) 40 (36) 118 82
Long-term debt....................... (3) -- (3) (3) -- (3)
--------- --------- --------- --------- --------- --------
Interest expense.................. 5,005 (448) 4,557 4,699 1,338 6,037
--------- --------- --------- --------- --------- --------
Net interest income............... $ 8,773 $ (2,235) $ 6,538 $ 7,379 $ (831) $ 6,548
========= ========= ========= ========= ========= ========
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
The net interest margin, which measures tax-equivalent net interest income
as a percentage of average earning assets, amounted to 4.56% in 1998 as compared
to 4.62% in 1997 and 4.67% in 1996. The Company's rates on earning assets and
interest-bearing liabilities are influenced by national market trends and
competitive pressures in local markets. During 1998, when national market
interest rates declined, the Company's yield on earning assets decreased more
than the rate on interest-bearing liabilities, which resulted in a lower net
interest margin as compared to 1997. The yield on loans for 1998 dropped 32
basis points as compared to 1997, which was the primary factor contributing to a
lower net interest margin.
Table 2 -- Average Balances and Average Yields and Rates (in thousands,
except percentages):
1998 1997 1996
--------------------------- ----------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Assets
Short-term investments.. $ 85,247 $ 4,543 5.33% $ 70,136 $ 3,819 5.45% $ 39,898 $ 2,156 5.40%
Taxable investment
securities............. 547,438 33,383 6.10 543,561 33,348 6.14 515,858 30,658 5.94
Tax-exempt
investment securities(1) 67,068 4,426 6.60 36,954 2,408 6.52 22,509 1,476 6.56
Loans (1)(2)............ 770,183 70,963 9.21 657,325 62,645 9.53 575,658 55,345 9.61
---------- -------- ---------- ------- ---------- --------
Total earning assets.. 1,469,936 113,315 7.71 1,307,976 102,220 7.82 1,153,923 89,635 7.77
Cash and due from banks. 72,608 69,185 59,699
Bank premises and equipment 43,524 41,264 36,155
Other assets............ 21,720 21,564 18,831
Goodwill, net........... 22,466 10,315 5,624
Allowance for loan losses (9,912) (10,211) (10,488)
---------- ---------- ----------
Total assets.......... $1,620,342 $1,440,093 $1,263,744
========== ========== ==========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits $ 1,138,858 $ 46,134 4.05% $1,017,412 $41,614 4.09% $ 898,077 $ 35,656 3.97%
Short-term borrowings... 2,338 158 6.76 1,742 118 6.77 285 36 12.63
Long-term debt.......... -- -- 33 3 8.58 70 6 8.57
---------- -------- ---------- ------- ---------- --------
Total interest-
bearing liabilities... 1,141,196 46,292 4.06 1,019,187 41,735 4.09 898,432 35,698 3.97
-------- ------- --------
Noninterest-bearing
deposits 306,743 262,554 224,896
Other liabilities....... 12,108 12,028 11,059
---------- ---------- ----------
Total liabilities..... 1,460,047 1,293,769 1,134,387
Shareholders' equity....... 160,295 146,324 129,357
---------- ---------- ----------
Total liabilities and
Shareholders' equity.... $1,620,342 $1,440,093 $1,263,744
========== ========== ==========
Net interest income........ $ 67,023 $60,485 $ 53,937
======== ======= ========
Rate Analysis:
Interest income/earning assets 7.71% 7.82% 7.77%
Interest expense/earning assets 3.15 3.20 3.10
---- ---- ----
Net yield on earning assets 4.56% 4.62% 4.67%
==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
13
Noninterest Income. Noninterest income for 1998 was $22.4 million, an
increase of $2.9 million, or 14.7%, as compared to 1997. This increase was
primarily a result of (i) an increase in trust fees of $761 thousand due
primarily to the January 1998 addition of the Texas Commerce-San Angelo Trust
Company, which earned $600 thousand in gross fees during 1998; (ii) an increase
in service fees on deposit accounts of $1.2 million, which reflects growth in
the number of accounts and the volume of transactions processed; and (iii) an
increase in real estate mortgage fees of $555 thousand, or 69.1%, which resulted
from a significant increase in the volume of loan originations and loan
refinancings processed and placed in the secondary market. Table 3 provides
comparisons for other categories of noninterest income.
Total noninterest income for 1997 was $19.5 million, an increase of $3.0
million, or 18.2%, as compared to 1996. This increase was primarily a result of
(i) an increase in trust fees of $436 thousand due primarily to an increase of
$85.0 million, or 14.0% increase in trust assets during 1997; (ii) an increase
in service fees on deposit accounts of $2.0 million, which reflects growth in
the number of accounts and the volume of transactions processed; and (iii) an
increase in ATM fees of $261 thousand due primarily to an increase in the number
of cardholders and the volume of transactions processed.
Table 3 -- Noninterest Income (in thousands):
Increase Increase
1998 (Decrease) 1997 (Decrease) 1996
----------- ----------- ----------- ----------- -----------
Trust fees.............................. $ 4,749 $ 761 $ 3,988 $ 436 $ 3,552
Service fees on deposit accounts........ 11,838 1,187 10,651 1,976 8,675
Real estate mortgage fees............... 1,358 555 803 235 568
Net securities gains (losses)........... 42 42 -- (15) 15
Other:
ATM fees............................. 1,034 295 739 261 478
Mastercard fees...................... 872 3 869 95 774
Miscellaneous income................. 840 (41) 881 (45) 926
Safe deposit rental fees............. 391 40 351 84 267
Exchange fees........................ 381 29 352 12 340
Credit life fees..................... 250 (95) 345 84 261
Gain on sale of repossessed assets... 235 196 39 (99) 138
Brokerage commissions................ 213 (50) 263 62 201
Interest on loan recoveries.......... 148 (57) 205 (91) 296
----------- ----------- ----------- ----------- -----------
Total other........................ 4,364 320 4,044 363 3,681
----------- ----------- ----------- ----------- -----------
Total Noninterest Income............. $ 22,351 $ 2,865 $ 19,486 $ 2,995 $ 16,491
=========== =========== =========== =========== ===========
Noninterest Expense. Total noninterest expense for 1998 was $52.4 million,
an increase of $5.9 million, or 12.7%, as compared to 1997. An important measure
in determining whether a banking company effectively managed noninterest
expenses is the efficiency ratio, which is calculated by dividing noninterest
expense by the sum of net interest income on a tax-equivalent basis and
noninterest income. The Company's efficiency ratios were 58.65% for 1998, 58.17%
for 1997, and 56.55% for 1996. Management believes that the ratio of 58.65% for
1998 compared favorably to the Federal Reserve Bank peer group ratio of 59.59%.
Salaries and employee benefits for 1998 totaled $26.7 million, an increase
of $2.9 million, or 12.2%, as compared to 1997. The TCB-San Angelo Acquisition
accounted for approximately $1.3 million of this increase. Net occupancy and
equipment expense in the aggregate for 1998 increased by $800 thousand as
compared to 1997. Approximately $300 thousand of this increase for 1998 related
to facilities and equipment added as a result of the TCB-San Angelo Acquisition.
Goodwill amortization, a noncash expense, was $1.6 million for 1998, an increase
of $907 thousand as compared to 1997, and also resulted primarily from the
TCB-San Angelo Acquisition. Audit and accounting fees for 1998 increased by $277
thousand and resulted primarily from the Company's outsourcing of internal audit
during 1998 which was offset by a greater amount through decreases in other
noninterest expenses, primarily salaries and travel. The Company outsourced
internal audit to reduce expense and improve effectiveness of the internal audit
function.
Total noninterest expense for 1997 was $46.5 million, an increase of $6.7
million, or 16.8%, as compared to 1996. Salaries and employee benefits totaled
$23.8 million, an increase of $2.8 million as compared to 1996. The TCB-San
Angelo and Southlake Acquisitions accounted for approximately $1.4 million of
this increase. Net occupancy and equipment expense in the aggregate for 1997
increased by $1.0 million. Approximately $470 thousand of the increase related
14
to such acquisitions, which contributed to higher depreciation, maintenance and
property tax expense when compared to 1996. Goodwill amortization expense
increased by $300 thousand as a result of the TCB-San Angelo Acquisition.
Table 4 -- Noninterest Expense (in thousands):
Increase Increase
1998 (Decrease) 1997 (Decrease) 1996
----------- ----------- ----------- ----------- -----------
Salaries................................ $ 20,732 $ 2,189 $ 18,543 $ 2,304 $ 16,239
Medical and other benefits.............. 2,354 348 2,006 261 1,745
Profit sharing.......................... 2,027 203 1,824 109 1,715
Payroll taxes........................... 1,566 167 1,399 167 1,232
----------- ----------- ----------- ----------- -----------
Total salaries and employee
benefits........................... 26,679 2,907 23,772 2,841 20,931
Net occupancy expense .................. 4,185 387 3,798 395 3,403
Equipment expense....................... 4,091 413 3,678 632 3,046
Goodwill amortization................... 1,655 907 748 300 448
Other:
Data processing and operation fees... 1,149 (164) 1,313 389 924
Postage.............................. 1,141 51 1,090 133 957
Printing, stationery and supplies.... 1,102 (63) 1,165 53 1,112
Advertising.......................... 1,093 (5) 1,098 226 872
Correspondent bank service charges... 1,092 104 988 86 902
ATM expense.......................... 823 110 713 154 559
Credit card fees..................... 753 15 738 88 650
Telephone............................ 721 78 643 219 424
Public relations and business
development........................ 596 57 539 56 483
Directors' fees...................... 510 (70) 580 126 454
Audit and accounting fees............ 660 277 383 77 306
Legal fees........................... 497 97 400 121 279
Other professional and service fees.. 462 99 363 75 288
Regulatory exam fees................. 410 47 363 (103) 466
Franchise tax........................ 404 40 364 85 279
Other miscellaneous.................. 4,399 613 3,786 740 3,046
----------- ----------- ----------- ----------- -----------
Total other........................ 15,812 1,286 14,526 2,525 12,001
----------- ----------- ----------- ----------- -----------
Total Noninterest Expense............... $ 52,422 $ 5,900 $ 46,522 $ 6,693 $ 39,829
=========== =========== =========== =========== ===========
Income Taxes. Income tax expense was $11.1 million for 1998 as compared to
$10.6 million for 1997 and $9.9 million for 1996. The Company's effective tax
rates on pretax income were 32.3%, 33.4% and 34.2%, respectively, for the years
1998, 1997 and 1996. The decreases for 1998 and 1997 were due to higher levels
of nontaxable interest income resulting from increased volumes of tax-exempt
securities.
At December 31, 1998 and 1997, the Company had deferred tax assets of $669
thousand and $1.2 million, respectively. Management believes that it is more
likely than not that the deferred tax assets, net of the recorded valuation
allowance, will be realized in the future because of the recent history of
taxable income generated by the Company and the subsidiary bank to which the net
operating loss carryforward relates. On a consolidated basis, taxable income for
the Company was approximately $32.2 million, $28.8 million, and $26.5 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
The use of the net operating loss carryforward is conditioned upon taxable
income generated by the subsidiary bank which originally incurred operating
losses. The net operating loss carryforward was acquired in the purchase of the
stock of the subsidiary bank, and under applicable Internal Revenue Service
regulations regarding change of control, its usage is limited to a predetermined
amount in each future period. The net operating loss carryforward approximates
$1.1 million at December 31, 1998, with a usage limitation of $340 thousand per
year. The net operating loss carryforward expires in the years 2001 through
2005. Taxable income generated by the subsidiary bank before the net operating
loss carryforward was approximately $1.9 million, $1.6 million, and $1.9 million
in the years ended December 31, 1998, 1997 and 1996, respectively.
15
The Company established a valuation allowance for the net operating loss
carryforward because full utilization of this carryforward depends on future
taxable income in years when the Company is unable to determine that it is more
likely than not that taxable income of the subsidiary bank will be available.
Balance Sheet Review
Loans. The loan portfolio is comprised of loans made to businesses,
individuals, and farm and ranch operations located in the primary trade areas
served by the Company's subsidiary banks. Real estate loans represent loans
primarily for new home construction and owner-occupied real estate. The
structure of loans in the real estate mortgage classification generally provides
repricing intervals to minimize the interest rate risk inherent in fixed rate
mortgage loans. As of December 31, 1998, total loans were $779.5 million, an
increase of $36.1 million, or 4.9%, as compared to December 31, 1997. Real
estate loans and consumer loans as of December 31, 1998, increased $23.4 million
and $20.7 million, respectively, as compared to December 31, 1997. Commercial,
financial and agricultural loans as of December 31, 1998, were $278.6 million, a
decrease of $7.9 million as compared to December 31, 1997. A $7.6 million
reduction in agricultural loans, which was due primarily to unfavorable weather
conditions and lower cattle prices, was a primary factor in this decrease. Loans
averaged $770.2 million during 1998, an increase of $112.8 million.
Approximately $67.8 million of the increase was internally generated and $45.0
million resulted from the TCB-San Angelo Acquisition.
Table 5 -- Composition of Loans (in thousands, except percentages):
December 31, 1998 December 31, 1997
--------------------- ---------------------
Amount % of Total Amount % of Total
---------- -------- ---------- -------
Commercial, financial and agricultural........................ $ 278,647 35.74% $ 286,630 38.55%
Real estate - construction.................................... 36,721 4.71 34,100 4.59
Real estate - mortgage........................................ 198,447 25.46 177,658 23.90
Consumer...................................................... 265,729 34.09 245,068 32.96
---------- -------- ---------- -------
$ 779,544 100.00% $ 743,456 100.00%
========== ======== ========== =======
Asset Quality. Loan portfolios of each of the subsidiary banks are subject
to periodic reviews by the Company's centralized independent loan review group
as well as periodic examinations by State and Federal bank regulatory agencies.
Loans are placed on nonaccrual status when, in the judgment of Management, the
collectibility of principal or interest under the original terms becomes
doubtful. Nonperforming assets, which consist of nonperforming loans and
foreclosed assets, were $3.2 million at December 31, 1998, as compared to $5.1
million at December 31, 1997. As a percent of loans and foreclosed assets,
nonperforming assets were 0.41% at December 31, 1998, as compared to 0.68% at
December 31, 1997. Management was not aware of any material classified credit
not properly disclosed as nonperforming at December 31, 1998.
Table 6 -- Nonperforming Assets (in thousands, except percentages):
At December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Nonaccrual loans........................ $ 2,717 $ 3,668 $ 2,906 $ 1,589 $ 1,893
Loans past due 90 days or more.......... 67 134 116 181 101
Restructured loans...................... -- 358 373 368 397
----------- ----------- ----------- ----------- -----------
Nonperforming loans................ 2,784 4,160 3,395 2,138 2,391
Foreclosed assets....................... 385 936 806 708 1,040
----------- ----------- ----------- ----------- -----------
Total nonperforming assets......... $ 3,169 $ 5,096 $ 4,201 $ 2,846 $ 3,431
=========== =========== =========== =========== ===========
As a % of loans and
foreclosed assets.................. 0.41% 0.68% 0.69% 0.53% 0.72%
Provision and Allowance for Loan Losses. The allowance for loan losses is
the amount deemed by Management as of a specific date to be adequate to provide
for possible losses on loans that may become uncollectible. Management
determines the allowance and the required provision expense by reviewing general
loss experiences and the performances of specific credits. The provision for
loan losses was $1.1 million for 1998 and 1997 as compared to $1.2 million for
1996. As a percent of average loans, net loan charge-offs were .36% during 1998
as compared to .26% during 1997. This increase was primarily due to the Company
experiencing increased net loan losses from consumer loans, which to a large
extent related to indirect automobile loans. As a consequence, the Company's
subsidiary banks active in indirect automobile lending took steps to upgrade the
credit quality of the indirect automobile loan portfolios. The allowance for
loan losses as a percent of loans was 1.15% as of December 31, 1998, as compared
16
to 1.43% as of December 31, 1997. Management anticipates that the ratio of
allowance for loan losses to loans will remain above 1% in future periods. A key
indicator of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans, which consist of nonaccrual loans, loans past
due 90 days, and restructured loans. As of December 31, 1998, the ratio was
322.84% as compared to 255.58% at December 31, 1997.
Table 7 -- Loan Loss Experience and Allowance for Loan Losses (in
thousands, except percentages):
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
Balance at January 1,............................... $ 10,632 $ 9,797 $ 9,650 $ 9,769 $ 10,132
Allowance established from purchase acquisition..... -- 1,444 800 83 --
--------- --------- -------- -------- ---------
10,632 11,241 10,450 9,852 10,132
Loans charged off................................... 4,159 3,127 2,764 1,192 1,812
Loans recovered..................................... 1,375 1,404 911 821 2,331
--------- --------- -------- -------- ---------
Net (recoveries) charge-offs........................ 2,784 1,723 1,853 371 (519)
Provision (credit) for loan losses.................. 1,140 1,114 1,200 169 (882)
--------- --------- -------- -------- ---------
Balance at December 31,............................. $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
========= ========= ======== ======== =========
Loans at year-end................................... $ 779,544 $ 743,456 $604,815 $536,030 $ 474,480
Average loans....................................... 770,183 657,325 575,658 493,831 457,461
Net charge offs (recoveries)/average loans.......... 0.36% 0.26% 0.32% 0.08% (0.11)%
Allowance for loan losses/year-end loans............ 1.15 1.43 1.62 1.80 2.06
Allowance for loan losses/nonperforming assets...... 322.84 255.58 288.57 451.36 408.57
Investment Securities. The investment securities portfolio was $625.9
million as of December 31, 1998, as compared to $616.0 million for December 31,
1997. At December 31, 1998, securities with an amortized cost of $414.3 million
were classified as securities held-to-maturity and securities with a market
value of $211.6 million were classified as securities available-for-sale. The
investment securities portfolio as of December 31, 1998, was comprised primarily
of U. S. Treasury and U. S. Government corporations and agencies securities with
relative short maturities and had an average yield of 6.14%. The Company did not
hold any collateralized mortgage obligations that entail higher risks than
standard mortgage-backed securities. As of December 31, 1998, total investment
securities included structured notes with an amortized cost of $7.0 million and
an approximate market value of $6.9 million. See Note 2 to the Consolidated
Financial Statements for additional disclosures relating to the maturities and
fair values of the investment portfolio at December 31, 1998 and 1997.
Table 8 -- Maturities and Yields of Investment Securities Held December 31,
1998 (in thousands, except percentages):
Maturing
--------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
---------------- ---------------- ---------------- ---------------- ----------------
Held-to-Maturity: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- -------- ---- -------- ---- -------- ---- -------- ---- -------- ----
U.S. Treasury obligations $ 18,327 5.99% $ 9,081 6.25% $ -- --% $ -- --% $ 27,408 6.08%
Obligations of U.S. ......
Government corporations
and agencies .......... 58,679 6.08 197,813 5.91 9,500 6.05 -- -- 265,992 5.95
Obligations of states and
political subdivisions 5,292 6.44 49,117 6.37 11,371 7.16 984 8.14 66,764 6.54
Other securities ......... 4,317 5.97 5,167 5.41 21 8.05 -- -- 9,505 5.67
Mortgage-backed securities 2,904 5.88 22,388 5.97 5,805 5.97 13,537 6.60 44,634 6.15
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total ................. $ 89,519 6.07% $283,566 5.99% $ 26,697 6.51% $ 14,521 6.70% $414,303 6.07%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
17
Maturing
--------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
---------------- ---------------- ---------------- ---------------- ----------------
Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- -------- ---- -------- ---- -------- ---- -------- ---- -------- ----
U.S. Treasury obligations $ 6,289 6.16% $ 3,654 6.39% $ -- --% $ -- --% $ 9,943 6.25%
Obligations of U.S.
Government corporations
and agencies.......... 23,184 6.00 44,982 6.19 25,135 6.15 2,124 5.83 95,425 6.13
Obligations of states and
political subdivisions -- -- 4,191 6.15 1,682 6.78 27,990 7.44 33,863 7.25
Other securities......... -- -- 24,772 5.39 -- -- 4,790 5.82 29,562 5.46
Mortgage-backed securities 822 4.83 14,412 5.91 26,854 6.21 707 7.13 42,795 6.10
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 30,295 6.00% $ 92,011 6.08% $ 53,671 6.19% $ 35,611 7.21% $211,588 6.28%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Maturing
--------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
---------------- ---------------- ---------------- ---------------- ----------------
Total Investment Securities: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------- -------- ---- -------- ---- -------- ---- -------- ---- -------- ----
U.S. Treasury obligations $ 24,616 6.03% $ 12,735 6.29% $ -- --% $ -- --% $ 37,351 6.12%
Obligations of U.S.
Government corporations
and agencies.......... 81,863 6.06 242,795 5.96 34,635 6.12 2,124 5.83 361,417 6.00
Obligations of states and
political subdivisions 5,292 6.44 53,308 6.35 13,053 7.11 28,974 7.47 100,627 6.78
Other securities......... 4,317 5.97 29,939 5.39 21 8.05 4,790 5.82 39,067 5.51
Mortgage-backed securities 3,726 5.65 36,800 5.94 32,659 6.17 14,244 6.62 87,429 6.13
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total................. $119,814 6.05% $375,577 6.01% $ 80,368 6.29% $ 50,132 7.05% $625,891 6.14%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Deposits. Deposits held by subsidiary banks represent the Company's primary
source of funding. Total deposits were $1.505 billion as of December 31, 1998,
as compared to $1.489 billion as of December 31, 1997. Total deposits averaged
$1.456 billion during 1998, an increase of $165.6 million over the average for
1997. The TCB-San Angelo Acquisition accounted for approximately $114.0 million
of the increase. Table 9 provides a breakdown of average deposits and rates paid
over the past three years and the remaining maturity of time deposits of $100
thousand or more.
Table 9 -- Composition of Average Deposits and Remaining Maturity of Time
Deposits of $100,000 or More (in thousands, except percentages):
1998 1997 1996
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- ---------- ----
Noninterest-bearing deposits........ $ 306,743 -- $ 262,554 -- $ 224,896 --
Interest-bearing deposits
Interest-bearing checking........ 173,051 2.01% 212,845 2.04% 201,958 2.05%
Savings and money market accounts 418,427 3.23 306,503 3.65 242,415 3.32
Time deposits under $100,000..... 390,791 5.23 359,960 5.25 331,534 5.15
Time deposits of $100,000 or more 156,589 5.56 138,104 5.22 122,170 5.24
---------- ---- ---------- ---- ---------- ----
Total interest-bearing deposits.. 1,138,858 4.05% 1,017,412 4.09% 898,077 3.97%
---------- ---------- ----------
Total average deposits.............. $1,445,601 $1,279,966 $1,122,973
========== ========== ==========
December 31, 1998
-----------------
Three months or less........................................ $ 61,305
Over three through six months............................... 37,093
Over six through twelve months.............................. 47,853
Over twelve months.......................................... 16,521
----------
Total time deposits of $100,000 or more................ $ 162,772
==========
Capital. Total shareholders' equity was $169.4 million, or 10.05% of total
assets, at December 31, 1998, as compared to $154.4 million, or 9.32% of total
assets, at December 31, 1997. During 1998, total shareholders' equity averaged
$160.3 million, or 9.89% of average assets, as compared to $146.3 million, or
10.16% of average assets, during 1997.
Banking system regulators measure capital adequacy by means of the
risk-based capital ratio and leverage ratio. The risk-based capital rules
provide for the weighting of assets and off-balance-sheet commitments and
18
contingencies according to prescribed risk categories ranging from 0% to 100%.
Regulatory capital is then divided by risk-weighted assets to determine the
risk-adjusted capital ratios. The leverage ratio is computed by dividing
shareholders' equity less intangible assets by quarter-to-date average assets
less intangible assets. Regulatory minimums for risk-based and leverage ratios
are 8.00% and 3.00%, respectively. As of December 31, 1998, the Company's total
risk-based and leverage ratios were 17.01% and 9.02%, respectively, as compared
to total risk-based and leverage ratios of 15.95% and 8.28% as of December 31,
1997. In 1998, the Company experienced a higher rate of growth in tangible
equity capital (11.2%) than assets (1.9%) and reduced short-term debt by $6.7
million, which resulted in higher capital ratios as of December 31, 1998, as
compared to December 31, 1997.
Interest Rate Risk. Interest rate risk results when the maturity or
repricing intervals of interest-earning assets and interest-bearing liabilities
are different. The Company's exposure to interest rate risk is managed primarily
through the Company's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities that generate favorable
earnings while limiting the potential negative effects of changes in market
interest rates. The Company uses no off-balance-sheet financial instruments to
manage interest rate risk.
Each subsidiary bank has an asset/liability committee that monitors
interest rate risk and compliance with investment policies. Each subsidiary bank
tracks interest rate risk by, among other things, interest-sensitivity gap and
simulation analysis. Table 10 sets forth the interest rate sensitivity of the
Company's consolidated assets and liabilities as of December 31, 1998, and sets
forth the repricing dates of the Company's consolidated interest-earning assets
and interest-bearing liabilities as of that date, as well as the Company's
consolidated interest rate sensitivity gap percentages for the periods
presented. The table is based upon assumptions as to when assets and liabilities
will reprice in a changing interest rate environment. These assumptions are
estimates made by Management. Assets and liabilities indicated as maturing or
otherwise repricing within a stated period may, in fact, mature or reprice at
different times and at different volumes than those estimated. Also, the renewal
or repricing of certain assets and liabilities can be discretionary and subject
to competitive and other pressures. Therefore, the following table does not and
cannot necessarily indicate the actual future impact of general interest rate
movements on the Company's consolidated net interest income.
19
Table 10 -- Interest Sensitivity Analysis (in thousands, except
percentages):
December 31,
1998
Estimated
1999 2000 2001 2002 2003 Beyond Total Fair Value
---------- -------- -------- -------- -------- -------- ---------- ----------
Loans
Fixed rate loans...... $ 191,670 $ 52,061 $ 71,987 $ 81,039 $ 80,301 $ 50,075 $ 527,133 $ 532,633
Average interest rate 9.24% 10.10% 9.84% 9.34% 9.34% 8.54% 9.37%
Adjustable rate loans. 252,411 -- -- -- -- -- 252,411 252,411
Average interest rate 8.49 -- -- -- -- -- 8.49
Investment securities
Fixed rate securities. 114,876 89,249 101,806 97,083 74,742 124,308 602,064 607,185
Average interest rate 6.08 6.13 5.97 6.06 5.87 6.56 6.14
Adjustable rate
securities 23,577 250 -- -- -- -- 23,827 23,655
Average interest rate 5.74 4.30 -- -- -- -- 5.72
Other earning assets
Adjustable rate other. 116,295 -- -- -- -- -- 116,295 116,295
Average interest rate 4.66 -- -- -- -- -- 4.66
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
assets $ 698,829 $141,560 $173,793 $178,122 $155,043 $174,383 $1,521,730 $1,532,179
Average interest rate 6.80% 7.44% 7.47% 7.35% 7.54% 7.05% 7.11%
Deposits
Fixed rate deposits... $ 441,076 $ 51,170 $ 11,436 $ 8,114 $ 7,020 $ 223 $ 519,039 $ 521,803
Average interest rate 5.05% 5.79% 5.48% 5.77% 5.42% 4.40% 5.14%
Adjustable rate deposits 651,098 -- -- -- -- -- 651,098 651,098
Average interest rate 2.68 -- -- -- -- -- 2.68
Other interest-bearing
liabilities
Adjustable rate other. 517 -- -- -- -- -- 517 517
Average interest rate 4.44 -- -- -- -- -- 4.44
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
liabilities $1,092,691 $ 51,170 $ 11,436 $ 8,114 $ 7,020 $ 223 $1,170,654 $1,173,418
Average interest rate 3.64% 5.79% 5.48% 5.77% 5.42% 4.40% 3.78%
Interest sensitivity gap. $ (393,862) $ 90,390 $162,357 $170,008 $148,023 $174,160 $ 351,076 $ 358,761
Cumulative interest
sensitivity gap.......... (393,862) (303,472) (141,115) 28,893 176,916 351,076
Ratio of interest sensitive
assets to interest
sensitive liabilities 63.95 -- -- -- -- --
Cumulative ratio of
interest sensitive assets
to interest sensitive
liabilities............. 63.95 73.47 87.79 102.48 115.12 129.99
Cumulative interest
sensitivity gap as a
percent of earning
assets.................. (25.88)% (19.94)% (9.27)% 1.90% 11.63% 23.07%
As of December 31, 1997, the Company's 1998 interest-sensitivity gap was
$323.8 million and its 1998 ratio of interest sensitive assets to interest
sensitive liabilities was 69.73%.
Management estimates that, as of December 31, 1998 and December 31, 1997,
an upward shift of interest rates by 200 basis points would result in an
increase of projected net interest income of 6.1% and 4.2%, respectively, and a
downward shift of interest rates by 200 basis points would result in a reduction
in projected net interest income of 4.2% and 5.4%, respectively. These are good
faith estimates and assume that the composition of the Company's interest
sensitive assets and liabilities existing at each year-end will remain constant
over the relevant twelve month measurement period and that changes in market
interest rates are instantaneous and sustained across the yield curve regardless
of duration of pricing characteristics of specific assets or liabilities. Also,
this analysis does not contemplate any actions that the Company might undertake
in response to changes in market interest rates. In Management's belief, these
estimates are not necessarily indicative of what actually could occur in the
event of immediate interest rate increases or decreases of this magnitude.
Management believes that it is unlikely that such changes would occur in a short
time period. As interest-bearing assets and liabilities reprice at different
time frames and proportions to market interest rate movements, various
assumptions must be made based on historical relationships of these variables in
reaching any conclusion. Since these correlations are based on competitive and
market conditions, the Company's future results would, in Management's belief,
be different from the foregoing estimates, and such results could be material.
Liquidity. Liquidity is the ability of the Company to meet cash demands as
they arise. Such needs can develop from loan demand, deposit withdrawals or
acquisition opportunities. Asset liquidity is provided by cash and assets, which
are readily marketable or which will mature in the near future. Liquid assets
include cash, Federal funds sold, and short-term investments in time deposits in
banks. Liquidity is also provided by access to funding sources, which include
20
core depositors and correspondent banks that maintain accounts with and sell
Federal funds to subsidiary banks of the Company. Given the strong core deposit
base and relatively low loan deposit ratios maintained at the subsidiary banks,
Management considers the current liquidity position to be adequate to meet
short-term liquidity needs.
Parent Company Funding. The Company's ability to fund various operating
expenses, dividends, and cash acquisitions is generally dependent on
Company-only earnings, cash reserves and funds derived from its subsidiary
banks. These funds historically have been produced by intercompany dividends and
management fees that are limited to reimbursement of actual expenses. The
Company anticipates that its recurring cash sources will continue to include
dividends and management fees from subsidiary banks. At December 31, 1998,
approximately $13.8 million was available for the payment of intercompany
dividends by the subsidiary banks without the prior approval of regulatory
agencies. Also at December 31, 1998, the Company had $18.0 million available
under a line of credit with an unaffiliated financial institution.
Dividends. The Company's long-term dividend policy is to pay cash dividends
to its shareholders of between 40% and 45% of its net earnings while maintaining
adequate capital to support growth. The dividend payout ratios have amounted to
41.7%, 41.2% and 40.3% of net earnings, respectively, in 1998, 1997 and 1996. On
December 1, 1998, the Company paid a stock dividend of one share of its common
stock for every ten shares of its common stock outstanding to shareholders of
record as of the close of business on November 16, 1998, which will result in a
10% increase in the Company's current quarterly dividend.
Year 2000
The Year 2000 issue is a programming issue that may affect many electronic
processing systems. Until recently, in order to minimize the length of data
fields, most date-sensitive programs eliminated the first two digits of the
year. This issue could affect information technology ("IT") systems and
date-sensitive embedded technology that controls certain systems (such as
telecommunications systems, security systems, etc.) leaving them unable to
properly recognize or distinguish dates in the twentieth and twenty-first
centuries and thereafter. For example, date-sensitive calculations may treat
"00" as the year 1900 rather than the year 2000. This treatment could result in
significant miscalculations when processing critical date-sensitive information
relating to dates after December 31, 1999.
The Company has completed its initial Year 2000 compliance assessment of
its core IT systems, which include loan, deposit and check processing systems.
These core IT systems are licensed from third parties, and these third parties
have warranted to the Company that their system is Year 2000 compliant. The
Company completed compliance testing of these core IT systems during the quarter
ended December 31, 1998. The Company believes that the results of its tests were
successful and that these results showed that these core IT systems are Year
2000 compliant. These results were reviewed and confirmed by an independent
third party that is competent in Year 2000 compliance testing hired by the
Company. The Company believes that, based on these results and the warranties
provided by the third parties that licensed these core IT systems to the
Company, these core IT systems are Year 2000 compliant.
The Company has also completed its initial Year 2000 compliance assessment
of its other IT systems, which includes automatic teller machine software
systems. These other IT systems are also licensed from third parties. These
third parties have either assured the Company that their system is Year 2000
compliant or identified necessary system upgrades to make their system Year 2000
compliant. The Company currently anticipates receiving the necessary systems
upgrades and completing Year 2000 compliance testing of these other IT systems
by June 30, 1999. There can be no assurance that these other IT systems will be
Year 2000 compliant by December 31, 1999. If any of these other IT systems are
not Year 2000 compliant by December 31, 1999, then the Year 2000 issue could
have a material adverse effect on the operations, financial condition and
results of operations of the Company.
The Year 2000 issue may also affect the Company's date-sensitive embedded
technology which controls systems such as the telecommunications systems,
security systems, etc. The Company does not believe that the cost to modify or
replace such technology to make it Year 2000 compliant will be material. But, if
such modifications or replacements, if required, are not made, the Year 2000
issue could have a material adverse effect on the operations, financial
condition and results of operations of the Company.
Ultimately, the potential impact of the Year 2000 issue will depend not
only on the corrective measures the Company undertakes, but also on the way in
which the Year 2000 issue is addressed by governmental agencies, businesses and
other entities that provide data to, or receive data from, the Company or any of
21
its subsidiaries, or whose financial condition or operations are important to
the Company or any of its subsidiaries, such as bank regulatory agencies, the
Federal Reserve banking system, and significant suppliers and customers. The
Company is in communication with significant customers and vendors to evaluate
the risk of their failure to be Year 2000 compliant and the extent to which the
Company may be vulnerable to such failure. There can be no assurance that the
systems of these third parties will be Year 2000 compliant by December 31, 1999,
or that the failure of these third parties to be Year 2000 compliant will not
have a material adverse effect on the operations, financial condition and
results of operations of the Company.
The cost of IT and embedded technology systems testing and upgrades is not
expected to be material to the Company's consolidated operating results. The
Company estimates the cost of testing, communication programs, and other related
items to be $210 thousand, with $180 thousand having been incurred and recorded
as noninterest expense during 1998. The Company also estimates the total cost of
system upgrades to make certain systems Year 2000 compliant to be approximately
$1.0 million, $800 thousand of which has been incurred through December 31,
1998, and which will be capitalized and amortized over future periods. All of
these costs have been and will continue to be funded with cash from operations.
Although the Company believes that its core IT systems are Year 2000
compliant, it has not developed a reasonably likely worst case Year 2000
scenario because testing of the Company's other IT systems has not yet been
completed, the Company has not yet identified all embedded technology that needs
modification and replacement, and the Company has not received assurances from
all of its significant customers and vendors regarding their Year 2000
compliance. The Company has, however, developed some contingency plans for Year
2000 noncompliance. As a matter of course, the Company will compile hard copy of
data on its core IT systems as of December 31, 1999. If any of the Company's
core IT systems or other IT systems fail because they are not Year 2000
compliant, the Company (including its subsidiary banks) intends to revert to a
manual system of tracking and accounting for the data that was formerly tracked
or accounted for by such system. The Company will manually recreate a history of
the subject data (e.g., a customer's deposit, checking or loan history, an
investment portfolio history, or a financial accounting history) from the
present back to a point in time when the Company believes it has reasonably
reliable and supportable subject data, which should be December 31, 1999. Then,
the Company will manually track and record such subject data until the related
IT system becomes Year 2000 compliant and is reasonably tested for such
compliance. At that point, the Company will transfer the manually-tracked
subject data to such system and continue tracking on such system. In addition,
if any of the telecommunications systems between the Company and its subsidiary
banks fail because they are not Year 2000 compliant, the Company and its
subsidiary banks will manually print and timely physically deliver the data
normally transferred through its telecommunications systems. Finally, the
Company will shut down all automatic teller machines if any of the IT systems
associated therewith fail due to Year 2000 noncompliance. The Company's plans
are not comprehensive and do not address all Year 2000 contingencies, including
contingencies for Year 2000 noncompliance by the Company's embedded technology
or the systems of governmental agencies, significant customers or significant
vendors. Also, there can be no assurance that the Company's contingency plans
will prevent the Company from suffering a material adverse effect on its
operations, financial condition or results of operations if any of its core IT
systems, other IT systems or embedded technology or any systems of a
governmental agency, a significant customer or significant vendor prove not to
be Year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management considers interest rate risk to be a significant market risk
for Bankshares. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" for disclosure regarding this market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Bankshares appear beginning on
page F-1.
Quarterly Results of Operations
The following tables set forth certain unaudited historical quarterly
financial data for each of the eight consecutive quarters in fiscal 1998 and
1997. This information is derived from unaudited consolidated financial
statements that include, in Bankshares' opinion, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation when read in
conjunction with the consolidated financial statements of Bankshares and notes
22
thereto included elsewhere in this Form 10-K. The amounts related to Bankshares'
common stock have been adjusted to give effect to all stock dividends and stock
splits.
1998
------------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------
Summary Income Statement Information:
Interest income $ 27,748 $ 28,187 $ 28,080 $ 27,853
Interest expense 11,289 11,625 11,620 11,758
--------- --------- --------- --------
Net interest income 16,459 16,562 16,460 16,095
Provision for loan losses 445 260 284 151
--------- --------- --------- --------
Net interest income after provision for loan losses 16,014 16,302 16,176 15,944
Noninterest income 5,646 5,756 5,493 5,456
Noninterest expense 13,176 13,315 12,952 12,979
--------- --------- --------- --------
Earnings before income taxes 8,484 8,743 8,717 8,421
Provision for income taxes 2,661 2,812 2,843 2,795
--------- --------- --------- --------
Net earnings $ 5,823 $ 5,931 $ 5,874 $ 5,626
========= ========= ========= ========
Per Share Data:
Net earnings per share $ 0.58 $ 0.60 $ 0.59 $ 0.57
Net earnings per share, assuming dilution 0.58 0.60 0.58 0.57
Cash dividends declared 0.275 0.250 0.250 0.227
Book value at period-end 17.03 16.79 16.26 15.90
Common stock sales price:
High $ 37.00 $ 40.00 $ 38.58 $ 39.55
Low 30.91 31.59 35.57 35.23
Close 35.00 32.39 36.08 36.59
1997
------------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------
Summary Income Statement Information:
Interest income $ 27,881 $ 25,223 $ 24,539 $ 23,831
Interest expense 11,930 10,337 9,900 9,568
--------- --------- --------- --------
Net interest income 15,951 14,886 14,639 14,263
Provision for loan losses 428 252 191 243
--------- --------- --------- --------
Net interest income after provision for loan losses 15,523 14,634 14,448 14,020
Noninterest income 5,084 5,030 4,775 4,597
Noninterest expense 12,653 11,646 11,297 10,926
--------- --------- --------- --------
Earnings before income taxes 7,954 8,018 7,926 7,691
Provision for income taxes 2,671 2,654 2,660 2,578
--------- --------- --------- --------
Net earnings $ 5,283 $ 5,364 $ 5,266 $ 5,113
========= ========= ========= ========
Per Share Data:
Net earnings per share $ 0.53 $ 0.54 $ 0.53 $ 0.52
Net earnings per share, assuming dilution 0.53 0.54 0.52 0.52
Cash dividends declared 0.227 0.227 0.227 0.200
Book value at period-end 15.56 15.27 14.91 14.32
Common stock sales price:
High $ 41.36 $ 41.36 $ 35.91 $ 29.55
Low 35.00 32.73 26.59 27.45
Close 38.98 41.36 35.23 28.41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP has served as Bankshares' independent accountants since
1990. There have been no disagreements between management of Bankshares and its
current independent accountants relating to accounting practices and procedures
or financial disclosure.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from Bankshares' Proxy Statement for the 1999 Annual Meeting of Shareholders
(the "1999 Proxy Statement") under the captions "Proposal 1 -- Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from the 1999 Proxy Statement under the caption "Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the 1999 Proxy Statement under the captions "Proposal 1 -- Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from the 1999 Proxy Statement under the caption "Interest in Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Earnings for the years ended December 31,
1998, 1997 and 1996 Consolidated Statements of Comprehensive Earnings
for the years ended December 31, 1998, 1997 and 1996 Consolidated
Statements of Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 Notes to the Consolidated
Financial Statements
(2) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not
required, are not applicable or have been included in the consolidated
financial statements of Bankshares.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the
Exhibit Index immediately following Bankshares' financial statements.
The exhibits listed herein will be furnished upon written request to
Curtis R. Harvey, Executive Vice President and Chief Financial Officer,
First Financial Bankshares, Inc., 400 Pine Street, Abilene, Texas
79601, and payment of a reasonable fee that will be limited to
Bankshares' reasonable expense in furnishing such exhibits.
24
B. The following reports were filed on Form 8-K during the three months
ended December 31, 1998 and from December 31, 1998 to the date of
this Form 10-K.
Date of Report Description
- ----------------- ----------------------------------------------------------
December 17, 1998 On December 16, 1998, Bankshares consummated the exchange
offer (the "Exchange Offer") made to the shareholders of
Cleburne State Bank ("Cleburne"). Pursuant to the terms
of a Stock Exchange Agreement and Plan of Reorganization,
dated September 4, 1998, between Bankshares and Cleburne,
as amended, and as set forth in the prospectus delivered
to shareholders of Cleburne, Bankshares offered to
exchange 2.1073 shares of Bankshares common stock for each
share of Cleburne common stock, and pay cash in lieu of
fractional shares thereof. The Bankshares common stock
to be issued pursuant to the Exchange Offer was registered
with the Securities and Exchange Commission. Following
December 9, 1998, the transfer agent notified Bankshares
that 99.3% of the outstanding Cleburne common stock was
delivered for exchange. On December 16, 1998, upon
satisfaction of all remaining conditions to consummation
of the Exchange Offer, Bankshares instructed its transfer
agent to deliver stock certificates representing
Bankshares common stock to Cleburne shareholders who had
tendered shares therefor.
January 31, 1999 To comply with ASR No. 135 as interpreted by Staff
Accounting Bulletin No. 65, for the month ended January
31, 1999, Bankshares reported consolidated total
revenues of approximately $7.7 million, consolidated net
earnings of approximately $2.2 million and earnings per
share of $0.22.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date: March 19, 1999 By: /s/KENNETH T. MURPHY
--------------------
KENNETH T. MURPHY
Chairman of the Board, President,
Chief Executive Officer and Director
The undersigned directors and officers of First Financial Bankshares, Inc.
hereby constitute and appoint Curtis R. Harvey, with full power to act and with
full power of substitution and resubstitution, our true and lawful
attorney-in-fact with full power to execute in our name and behalf in the
capacities indicated below any and all amendments to this report and to file the
same, with all exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission and hereby ratify and confirm all that
such attorney-in-fact or his substitute shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/S/KENNETH T. MURPHY Chairman of the Board, President, Chief March 19, 1999
- ------------------------------------
Kenneth T. Murphy Executive Officer and Director
/S/CURTIS R. HARVEY Executive Vice President, Chief Financial March 19, 1999
- ------------------------------------
Curtis R. Harvey Officer, Controller and Chief Accounting
Officer
/S/JOSEPH E. CANON Director March 19, 1999
- ------------------------------------
Joseph E. Canon
/S/MAC A. COALSON Director March 19, 1999
- ------------------------------------
Mac A. Coalson
/S/DAVID COPELAND Director March 19, 1999
- ------------------------------------
David Copeland
/S/F. SCOTT DUESER Director March 19, 1999
- ------------------------------------
F. Scott Dueser
Director March ___, 1999
- ------------------------------------
Kade L. Matthews
/S/RAYMOND A. MCDANIEL, JR. Director March 19, 1999
- ------------------------------------
Raymond A. McDaniel, Jr.
/S/BYNUM MIERS Director March 19, 1999
- ------------------------------------
Bynum Miers
Director March ___, 1999
- ------------------------------------
Dian Graves Owen
/S/JAMES M. PARKER Director March 19, 1999
- ------------------------------------
James M. Parker
/S/JACK D. RAMSEY Director March 19, 1999
- ------------------------------------
Jack D. Ramsey
Director March ___, 1999
- ------------------------------------
Craig Smith
/S/F. L. STEPHENS Director March 19, 1999
- ------------------------------------
F. L. Stephens
/S/H. T. WILSON Director March 19, 1999
- ------------------------------------
H. T. Wilson
/S/WALTER F. WORTHINGTON Director March 19, 1999
- ------------------------------------
Walter F. Worthington
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
FIRST FINANCIAL BANKSHARES, INC. CONSOLIDATED FINANCIAL STATEMENTS
Management's Report on Responsibility for the Financial Statements......... F-2
Report of Independent Public Accountants................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Earnings.................................. F-4
Consolidated Statements of Comprehensive Earnings.................... F-5
Consolidated Statements of Shareholders' Equity...................... F-6
Consolidated Statements of Cash Flows................................ F-7
Notes to Consolidated Financial Statements............................ F-8
F-1
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The Management of First Financial Bankshares, Inc. is responsible for the
preparation, integrity, and fair presentation of its annual financial statements
as of December 31, 1998 and 1997, and for the three years in the period ended
December 31, 1998. The financial statements have been prepared in accordance
with generally accepted accounting principles and, as such, include amounts
based on judgments and estimates made by Management. Management has also
prepared the other information included herein and is responsible for its
accuracy and consistency with the financial statements.
The annual financial statements referred to above have been audited by
Arthur Andersen LLP, who have been given unrestricted access to all financial
records and related data, including minutes of all meetings of shareholders and
the Board of Directors. Management believes that all representations made to
Arthur Andersen LLP during the audits were valid and appropriate.
Kenneth T. Murphy Curtis R. Harvey
Chairman of the Board, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of First
Financial Bankshares, Inc. (a Texas corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of earnings,
comprehensive earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Financial Bankshares,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Dallas, Texas, Arthur Andersen LLP
January 13, 1999
F-2
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
-------------------------------------------------------
ASSETS 1998 1997
------ -------------- --------------
CASH AND DUE FROM BANKS ........................................ $ 84,237,577 $ 94,543,508
FEDERAL FUNDS SOLD ............................................. 116,091,417 121,220,839
-------------- --------------
Total cash and cash equivalents .............. 200,328,994 215,764,347
INTEREST-BEARING DEPOSITS IN BANKS ............................. 203,911 398,671
INVESTMENT IN SECURITIES:
Securities held-to-maturity (market value of $419,252,100 in
1998 and $438,368,614 in 1997) ......................... 414,302,781 435,896,533
Securities available-for-sale, at market value ............. 211,588,088 180,121,914
LOANS .......................................................... 779,544,287 743,455,772
Less- Allowance for loan losses ............................ 8,988,320 10,632,441
-------------- --------------
Net loans .................................... 770,555,967 732,823,331
BANK PREMISES AND EQUIPMENT, net ............................... 42,927,162 43,918,953
GOODWILL, net .................................................. 21,798,277 23,381,496
OTHER ASSETS ................................................... 24,941,695 24,738,409
-------------- --------------
Total assets ................................. $1,686,646,875 $1,657,043,654
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
NONINTEREST-BEARING DEPOSITS ................................... $ 334,719,132 $ 324,160,130
INTEREST-BEARING DEPOSITS ...................................... 1,170,136,708 1,164,548,598
-------------- --------------
Total deposits ............................... 1,504,855,840 1,488,708,728
DIVIDENDS PAYABLE .............................................. 2,736,689 2,162,899
NOTE PAYABLE ................................................... -- 4,700,000
OTHER LIABILITIES .............................................. 9,605,088 7,010,821
-------------- --------------
Total liabilities ............................ 1,517,197,617 1,502,582,448
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 20,000,000 shares;
issued and outstanding 9,952,683 and 9,025,852 shares
in 1998 and 1997, respectively ......................... 99,526,830 90,258,520
Capital surplus ............................................ 60,375,373 36,595,698
Retained earnings .......................................... 8,015,303 27,203,391
Unrealized gain on investment in securities
available-for-sale, net ................................ 1,531,752 403,597
-------------- --------------
Total shareholders' equity ................... 169,449,258 154,461,206
-------------- --------------
Total liabilities and shareholders' equity ... $1,686,646,875 $1,657,043,654
============== ==============
The accompanying notes are an integral part of these consolidated statements.
F-3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
INTEREST INCOME:
Interest and fees on loans .......................... $ 70,882,942 $ 62,608,256 $ 55,344,409
Interest on investment in securities-
Taxable ......................................... 33,382,559 33,347,596 30,657,617
Exempt from federal income tax .................. 3,058,861 1,699,442 1,005,713
Interest on federal funds sold and interest-bearing
deposits in banks ............................... 4,543,295 3,818,744 2,155,896
------------- ------------- -------------
111,867,657 101,474,038 89,163,635
------------- ------------- -------------
INTEREST EXPENSE:
Interest on time deposits ........................... 46,133,721 41,613,665 35,656,520
Other ............................................... 158,669 121,249 42,206
------------- ------------- -------------
46,292,390 41,734,914 35,698,726
------------- ------------- -------------
Net interest income ................... 65,575,267 59,739,124 53,464,909
PROVISION FOR LOAN LOSSES ............................... 1,139,500 1,114,000 1,200,000
------------- ------------- -------------
Net interest income after provision for
loan losses ......................... 64,435,767 58,625,124 52,264,909
------------- ------------- -------------
NONINTEREST INCOME:
Trust fees .......................................... 4,748,751 3,988,309 3,552,331
Service fees on deposit accounts .................... 11,838,173 10,651,395 8,674,559
Real estate mortgage fees ........................... 1,358,271 803,310 567,709
Net gain (loss) on securities transactions .......... 42,230 (381) 15,496
Other ............................................... 4,363,717 4,043,180 3,680,828
------------- ------------- -------------
22,351,142 19,485,813 16,490,923
------------- ------------- -------------
NONINTEREST EXPENSE:
Salaries and employee benefits ...................... 26,678,822 23,772,176 20,930,531
Net occupancy expense ............................... 4,185,224 3,798,148 3,403,466
Equipment expense ................................... 4,090,955 3,677,620 3,046,507
Goodwill amortization ............................... 1,654,682 747,731 447,731
Other expenses ...................................... 15,812,342 14,526,064 12,000,819
------------- ------------- -------------
52,422,025 46,521,739 39,829,054
------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES ............................ 34,364,884 31,589,198 28,926,778
INCOME TAX EXPENSE ...................................... 11,110,945 10,562,739 9,884,066
------------- ------------- -------------
NET EARNINGS ............................................ $ 23,253,939 $ 21,026,459 $ 19,042,712
============= ============= =============
NET EARNINGS PER SHARE .................................. $ 2.34 $ 2.12 $ 1.98
============= ============= =============
NET EARNINGS PER SHARE, ASSUMING DILUTION ............... $ 2.33 $ 2.11 $ 1.97
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
NET EARNINGS ........................................................... $ 23,253,939 $ 21,026,459 $ 19,042,712
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized gain (loss) on investment in securities
available-for-sale, before tax ................................. 1,777,853 1,009,314 (223,993)
Reclassification adjustment for realized (gains) losses on
investment in securities included in net earnings, before tax .. (42,230) 381 (15,496)
------------ ------------ ------------
Total other items of comprehensive earnings .......... 1,735,623 1,009,695 (208,497)
------------ ------------ ------------
COMPREHENSIVE EARNINGS, BEFORE INCOME TAXES ............................ 24,989,562 22,036,154 18,834,215
Income tax expense (benefit) related to other items of comprehensive
earnings ....................................................... 607,468 353,393 (72,974)
------------ ------------ ------------
COMPREHENSIVE EARNINGS ................................................. $ 24,382,094 $ 21,682,761 $ 18,907,189
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-----------------------------------------------------
Unrealized Gain
(Loss) on
Investment
Common Stock in Securities Total
------------ Capital Retained Available Shareholders'
Shares Amount Surplus Earnings For Sale, Net Equity
--------- ----------- ----------- ----------- ---------- ------------
BALANCE, December 31, 1995 5,713,450 $57,134,500 $37,115,629 $30,240,041 $ (112,899) $124,377,271
Net earnings -- -- -- 19,042,712 -- 19,042,712
Stock issuances 42,791 427,910 4,103 -- -- 432,013
Cash dividends declared,
$0.79 per share -- -- -- (7,306,767) -- (7,306,767)
Stock split-up, effected in
the form of a 25% dividend 1,336,902 13,369,020 -- (13,369,020) -- --
Change in unrealized gain
(loss) on investment in
securities available-for-
sale, net -- -- -- -- (135,523) (135,523)
--------- ----------- ----------- ----------- ---------- ------------
BALANCE, December 31, 1996 7,093,143 70,931,430 37,119,732 28,606,966 (248,422) 136,409,706
Business combination by
immaterial pooling-of-
interests 216,442 2,164,420 (521,224) 2,658,712 (4,283) 4,297,625
Net earnings -- -- -- 21,026,459 -- 21,026,459
Stock issuances 34,873 348,730 (2,810) -- -- 345,920
Cash dividends declared,
$0.88 per share -- -- -- (8,274,806) -- (8,274,806)
Stock split-up, effected
in the form of a 25% dividend 1,681,394 16,813,940 -- (16,813,940) -- --
Change in unrealized gain
(loss) on investment in
securities available-for-
sale, net -- -- -- -- 656,302 656,302
--------- ----------- ----------- ----------- ---------- ------------
BALANCE, December 31, 1997 9,025,852 90,258,520 36,595,698 27,203,391 403,597 154,461,206
Net earnings -- -- -- 23,253,939 -- 23,253,939
Cash dividends declared,
$1.00 per share -- -- -- (9,687,469) -- (9,687,469)
Stock issuances 23,257 232,570 60,857 -- -- 293,427
Stock dividend, 10% 903,574 9,035,740 23,718,818 (32,754,558) -- --
Change in unrealized gain
(loss) on investment in
securities available-for-
sale, net -- -- -- -- 1,128,155 1,128,155
--------- ----------- ----------- ----------- ---------- ------------
BALANCE, December 31, 1998 9,952,683 $99,526,830 $60,375,373 $ 8,015,303 $1,531,752 $169,449,258
========= =========== =========== =========== ========== ============
The accompanying notes are an integral part of these consolidated statements.
F-6
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................ $ 23,253,939 $ 21,026,459 $ 19,042,712
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization ....................... 6,157,299 5,006,176 4,022,819
Provision for loan losses ........................... 1,139,500 1,114,000 1,200,000
Premium amortization, net of discount accretion ..... 2,320,788 998,159 2,377,741
Gain on sale of assets .............................. (39,576) (38,723) (128,347)
Deferred federal income tax (benefit) expense ....... (110,993) (144,067) 269,834
(Increase) decrease in other assets ................. (1,109,754) (2,077,395) 674,866
Increase (decrease) in other liabilities ............ 4,049,267 (3,816,030) (403,041)
------------- ------------- -------------
Total adjustments ........................ 12,406,531 1,042,120 8,013,872
------------- ------------- -------------
Net cash provided by operating activities 35,660,470 22,068,579 27,056,584
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in banks ...... 194,760 589,823 1,278,531
Cash and cash equivalents received through purchase of
assets and liabilities, net of cash paid .............. -- 70,702,534 --
Acquisitions, net of cash and cash equivalents received . -- 10,436,740 (4,554,417)
Proceeds from sales of securities available-for-sale .... 23,910,732 10,325,207 498,500
Proceeds from maturities of securities available-for-sale 103,760,577 124,360,581 6,577,238
Proceeds from maturities of securities held-to-maturity . 218,953,525 234,268,378 185,989,754
Purchase of securities available-for-sale ............... (143,739,172) (266,783,072) (23,521,786)
Purchase of securities held-to-maturity ................. (213,301,021) (160,323,001)
Net increase in loans ................................... (38,950,855) (50,559,186) (33,792,784)
Capital expenditures .................................... (4,267,677) (5,215,797) (4,824,220)
Proceeds from sale of other assets ...................... 1,171,448 405,476 779,764
------------- ------------- -------------
Net cash used in investing activities .... (52,267,683) (38,101,410) (31,892,421)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits ............ 10,559,002 10,638,143 13,629,435
Net increase in interest-bearing deposits ............... 5,588,110 90,416,339 31,655,307
Net (decrease) increase in other short-term borrowings .. (6,155,000) 6,090,000 (487,938)
Proceeds of stock issuances ............................. 293,427 345,920 432,013
Dividends paid .......................................... (9,113,679) (7,993,195) (6,980,052)
------------- ------------- -------------
Net cash provided by financing activities 1,171,860 99,497,207 38,248,765
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ....... (15,435,353) 83,464,376 33,412,928
CASH AND CASH EQUIVALENTS, beginning of year ............... 215,764,347 132,299,971 98,887,043
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year ..................... $ 200,328,994 $ 215,764,347 $ 132,299,971
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-7
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1998, 1997, AND 1996
---------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Nature of Operations
- --------------------
First Financial Bankshares, Inc. (a Texas corporation) ("Bankshares") is a
multi-bank holding company which owns (through its wholly owned Delaware
subsidiary) all of the capital stock of ten banks located in Texas as of
December 31, 1998. Those subsidiary banks are First National Bank of Abilene;
Hereford State Bank; First National Bank, Sweetwater; Eastland National Bank;
The First National Bank in Cleburne; Stephenville Bank & Trust Co.; San Angelo
National Bank; Weatherford National Bank; Texas National Bank, Southlake; and
Cleburne State Bank. Each subsidiary bank's primary source of revenue is
providing loans and banking services to consumers and commercial customers in
the market area in which the subsidiary is located.
A summary of significant accounting policies of First Financial Bankshares,
Inc. and subsidiaries (the "Company") applied in the preparation of the
accompanying consolidated financial statements follows. The accounting
principles followed by the Company and the methods of applying them are in
conformity with both generally accepted accounting principles and prevailing
practices of the banking industry.
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period.
Actual results could differ from those estimates.
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
Investment In Securities
- ------------------------
Management classifies debt and equity securities as held-to-maturity,
available-for-sale, or trading based on their intent. Securities classified as
held-to-maturity are recorded at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized as adjustments to interest income
using the interest method. Securities classified as available-for-sale are
recorded at fair value, with unrealized gains and losses, net of deferred taxes,
excluded from earnings and reported in a separate component of shareholders'
equity. Securities classified as trading are recorded at fair value, with
unrealized gains and losses included in earnings. The Company had no trading
securities at December 31, 1998, 1997, or 1996.
F-8
Loans and Allowance for Loan Losses
- -----------------------------------
Loans are stated at the amount of unpaid principal, reduced by unearned
income and an allowance for loan losses. Unearned income on installment loans is
recognized in income over the terms of the loans in decreasing amounts using a
method which approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amounts outstanding. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when Management believes the
collectibility of the principal is unlikely.
The allowance is an amount that Management believes will be adequate to
absorb possible losses on existing loans that may become uncollectable based
upon Management's review and evaluation of the loan portfolio. The allowance for
loan losses is increased by charges to income and decreased by charge-offs (net
of recoveries). Management's periodic evaluation of the adequacy of the
allowance is based on general economic conditions, the financial condition of
the borrower, the value and liquidity of collateral, delinquency, prior loan
loss experience, and the results of periodic reviews of the portfolio. Accrual
of interest is discontinued on a loan when Management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
The Company's policy requires measurement of an impaired collateral
dependent loan based on the fair value of the collateral. Other loan impairments
are measured based on the present value of expected future cash flows or the
loan's observable market price. At December 31, 1998 and 1997, all significant
impaired loans have been determined to be collateral dependent and have been
measured utilizing the fair value of the collateral.
Bank Premises and Equipment
- ---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the life of the
respective lease or the estimated useful lives of the improvements, whichever is
shorter.
Excess of Cost Over Fair Value of Tangible Assets Acquired (Goodwill)
- ---------------------------------------------------------------------
Goodwill, relating to acquisitions of certain subsidiary banks, is being
amortized by the straight-line method over periods of 15 and 40 years.
Accounting Standards Adopted
- ----------------------------
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" as of January 1, 1998. This statement
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income is the total of net
income and all other nonowner changes in equity. The Company's only component of
comprehensive income is the unrealized holding gains or losses on
available-for-sale securities. The Company has elected to report their
comprehensive earnings in a separate financial statement, which displays the
calculation of these earnings for each of the three years in the period ending
December 31, 1998.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") was issued. The statement changes standards for the way public companies
identify and report operating segments in interim and annual financial
statements. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. The Company has determined that it operates one line of
business (community banking) located in a single geographic area (Texas).
Therefore, SFAS 131 has no effect on the Company's financial statements.
F-9
The Company adopted Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" as of
January 1, 1998. This statement establishes standards for reporting and display
of pension and other postretirement benefits in financial statements for fiscal
years beginning after December 15, 1997. The Company has restated its 1997
disclosures in order to display information comparable to 1998. See Note 12.
Recent Accounting Standard
- --------------------------
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. The statement is
effective for fiscal quarters of fiscal years beginning after June 15, 1999. The
Company plans to adopt SFAS 133 on January 1, 2000 and does not expect the
adoption of the statement to have a significant impact on the accompanying
financial statements.
Per Share Data
- --------------
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under
SFAS 128, net earnings per share ("EPS") are computed by dividing net earnings
by the weighted average number of shares of common stock outstanding during the
period. The Company calculates dilutive EPS assuming all outstanding options to
purchase common stock have been exercised at the beginning of the year (or the
time of issuance, if later.) The dilutive effect of the outstanding options is
reflected by application of the treasury stock method, whereby the proceeds from
the exercised options are assumed to be used to purchase common stock at the
average market price during the period. The following table reconciles the
computation of net EPS to dilutive EPS:
Net Per Share
Earnings Shares Amount
----------- ----------- --------
For the year ended December 31, 1998:
Net earnings per share .................. $23,253,939 9,939,910 $ 2.34
========
Effect of stock options ................. -- 56,277
----------- -----------
Net earnings per share, assuming dilution $23,253,939 9,996,187 $ 2.33
=========== =========== ========
For the year ended December 31, 1997:
Net earnings per share .................. $21,026,459 9,905,482 $ 2.12
========
Effect of stock options ................. -- 66,339
----------- -----------
Net earnings per share, assuming dilution $21,026,459 9,971,821 $ 2.11
=========== =========== ========
For the year ended December 31, 1996:
Net earnings per share .................. $19,042,712 9,614,306 $ 1.98
========
Effect of stock options ................. -- 60,277
----------- -----------
Net earnings per share, assuming dilution $19,042,712 9,674,583 $ 1.97
=========== =========== ========
Earnings and dividends per share have been retroactively adjusted for the effect
of stock dividends and splits.
F-10
Reclassifications
- -----------------
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
Statement of Cash Flows
- -----------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold.
Accounting for Income Taxes
- ---------------------------
The Company's provision for income taxes is generally based on income
before taxes adjusted for permanent differences between financial reporting and
taxable income. Deferred income taxes are provided for temporary differences
between financial reporting and taxable income.
2. CASH AND INVESTMENT IN SECURITIES:
----------------------------------
Certain subsidiary banks are required to maintain reserve balances with the
Federal Reserve Bank. During 1998 and 1997, such average balances totaled
approximately $7,374,000 and $14,170,000, respectively.
The amortized cost, estimated market values, and gross unrealized gains and
losses of the Company's investment in securities as of December 31, 1998 and
1997, are as follows:
December 31, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
Securities held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $293,400,457 $3,839,931 $(160,574) $297,079,814
Obligations of states and
political subdivisions 66,764,133 1,005,216 (37,883) 67,731,466
Corporate bonds 9,479,912 46,087 (5,345) 9,520,654
Mortgage-backed securities 44,633,072 303,585 (42,455) 44,894,202
Other securities 25,207 757 - 25,964
------------ ---------- --------- ------------
Total investment in debt
securities held-to-maturity $414,302,781 $5,195,576 $(246,257) $419,252,100
============ ========== ========= ============
F-11
December 31, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
Securities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations and agencies $104,255,679 $1,205,568 $ (93,564) $105,367,683
Obligations of states and
political subdivisions 33,255,223 685,446 (77,496) 33,863,173
Corporate bonds 25,984,410 433,116 (14,499) 26,403,027
Mortgage-backed securities 42,579,364 285,231 (69,191) 42,795,404
------------ ---------- --------- ------------
Total investment in debt
securities available-for-
sale 206,074,676 2,609,361 (254,750) 208,429,287
Other securities 3,158,801 - - 3,158,801
------------ ---------- --------- ------------
Total investment in securities
available-for-sale $209,233,477 $2,609,361 $(254,750) $211,588,088
============ ========== ========= ============
December 31, 1997
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
Securities held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $330,673,666 $2,123,552 $(407,968) $332,389,250
Obligations of states and
political subdivisions 34,456,155 525,072 (5,326) 34,975,901
Corporate bonds 9,967,597 51,946 (4,073) 10,015,470
Mortgage-backed securities 59,808,591 347,867 (161,151) 59,995,307
Other securities 990,524 2,162 - 992,686
------------ ---------- --------- ------------
Total investment in debt
securities held-to-maturity $435,896,533 $3,050,599 $(578,518) $438,368,614
============ ========== ========= ============
F-12
December 31, 1997
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
Securities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations and agencies $141,530,895 $ 526,529 $(273,569) $141,783,855
Obligations of states and
political subdivisions 8,168,069 242,438 (2,716) 8,407,791
Mortgage-backed securities 27,036,217 186,018 (58,715) 27,163,520
------------ ---------- --------- ------------
Total investment in debt
securities available-for-
sale 176,735,181 954,985 (335,000) 177,355,166
Other securities 2,766,756 - (8) 2,766,748
------------ ---------- --------- ------------
Total investment in securities
available-for-sale $179,501,937 $ 954,985 $(335,008) $180,121,914
============ ========== ========= ============
The Company invests in securities that have expected maturities that differ
from their contractual maturities. These differences arise because borrowers may
have the right to call or prepay obligations with or without a prepayment
penalty. These securities include collateralized mortgage obligations (CMOs) and
asset-backed securities. The expected maturities of these securities at December
31, 1998, were computed by using scheduled amortization of balances and
historical prepayment rates. At December 31, 1998 and 1997, the Company did not
hold any CMOs that entail higher risks than standard mortgage-backed securities.
Total investment in debt securities at December 31, 1998 and 1997, included
structured notes with an amortized cost basis of $7,014,000 and $11,726,000,
respectively, and an estimated fair value of $6,971,000 and $11,555,000,
respectively.
The amortized cost and estimated fair value of debt securities
held-to-maturity at December 31, 1998, by contractual and expected maturity, are
shown below.
Amortized Estimated
Cost Basis Fair Value
------------ ------------
Due within one year $ 89,519,281 $ 89,919,775
Due after one year through five years 283,566,259 287,618,411
Due after five years through ten years 26,696,519 27,049,816
Due after ten years 14,520,722 14,664,098
------------ ------------
Total debt securities held-to-maturity $414,302,781 $419,252,100
============ ============
F-13
The amortized cost and estimated fair value of debt securities
available-for-sale at December 31, 1998, by contractual and expected maturity,
are shown below.
Amortized Estimated
Cost Basis Fair Value
------------ ------------
Due within one year $ 30,157,179 $ 30,294,885
Due after one year through five years 91,329,621 92,011,184
Due after five years through ten years 51,808,229 53,671,596
Due after ten years 32,779,647 32,451,622
------------ ------------
Total debt securities available-for-sale $206,074,676 $208,429,287
============ ============
Securities, carried at approximately $164,215,000 and $149,921,000 at
December 31, 1998 and 1997, respectively, were pledged as collateral for public
or trust fund deposits and for other purposes required or permitted by law.
During 1998 and 1997, sales of investments in securities that were
classified as available-for-sale totaled $23,910,732 and $10,325,207,
respectively. Gross realized gains from the 1998, 1997, and 1996 sales were
$44,064, $4,642, and $18,200, respectively. Gross realized losses for the 1998,
1997, and 1996 sales were $1,834, $5,023, and $2,704, respectively. Specific
identification was used to determine cost in computing the realized gains and
losses.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
------------------------------------
Major classifications of loans are as follows:
December 31,
------------------------------
1998 1997
------------ ------------
Commercial, financial, and agricultural $278,647,355 $286,630,083
Real estate - construction 36,721,221 34,100,461
Real estate - mortgage 198,446,750 177,657,901
Consumer 272,100,492 253,603,206
------------ ------------
785,915,818 751,991,651
Unearned income (6,371,531) (8,535,879)
------------ ------------
Total loans $779,544,287 $743,455,772
============ ============
The Company's recorded investment in impaired loans and the related
valuation allowance are as follows:
December 31, 1998 December 31, 1997
------------------------ ------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- -------- ---------- ----------
Impaired loans-
Valuation allowance required $2,866,000 $586,862 $4,451,190 $1,249,893
No valuation allowance required - - - -
---------- -------- ---------- ----------
Total at end of year $2,866,000 $586,862 $4,451,190 $1,249,893
========== ======== ========== ==========
F-14
The average recorded investment in impaired loans for the years ended
December 31, 1998 and 1997, was approximately $3,659,000 and $3,948,000,
respectively. The Company had approximately $3,169,000 and $5,096,000 in
nonperforming assets at December 31, 1998 and 1997, respectively, of which
approximately $2,784,000 and $4,160,000 represented recorded investments in
impaired loans.
Interest payments received on impaired loans are recorded as interest
income unless collections of the remaining recorded investment is doubtful, at
which time payments received are recorded as reductions of principal. The
Company recognized interest income on impaired loans of $135,000 and $230,000
during the years ended December 31, 1998 and 1997, respectively, of which
$17,000 and $63,000 represented cash interest payments received and recorded as
interest income. If interest on impaired loans had been recognized on a full
accrual basis during the years ended December 31, 1998 and 1997, respectively,
such income would have approximated $400,000 and $439,000.
The allowance for loan losses as of December 31, 1998 and 1997, is
presented below. Management has evaluated the adequacy of the allowance for loan
losses by estimating the probable losses in various categories of the loan
portfolio which are identified below:
December 31,
----------------------------
1998 1997
----------- -----------
Allowance for loan losses provided for-
Loans specifically evaluated as impaired $ 586,862 $ 1,249,893
Unidentified impaired loans 8,401,458 9,382,548
----------- -----------
Total allowance for loan losses $ 8,988,320 $10,632,441
=========== ===========
The allowance for loan losses is maintained at a level considered adequate
to provide for estimated probable incurred losses. The allowance is reviewed
periodically, and as losses are incurred and the amounts become estimable, they
are charged to operations in the periods that they become known.
Changes in the allowance for loan losses are summarized as follows:
1998 1997 1996
------------ ----------- ----------
Balance at beginning of year $10,632,441 $ 9,797,543 $9,649,357
Add:
Allowance of acquired banks - 1,443,685 800,432
Provision for loan losses 1,139,500 1,114,000 1,200,000
Loan recoveries 1,375,048 1,403,876 911,692
Deduct:
Loan charge-offs (4,158,669) (3,126,663) (2,763,938)
------------ ----------- ----------
Balance at end of year $ 8,988,320 $10,632,441 $9,797,543
============ =========== ==========
F-15
4. BANK PREMISES AND EQUIPMENT:
----------------------------
The following is a summary of bank premises and equipment:
December 31,
------------------------------
1998 1997
------------ ------------
Land $ 8,031,111 $ 7,861,478
Buildings 43,628,814 43,518,979
Furniture and equipment 26,677,460 25,401,398
Leasehold improvements 6,523,911 5,618,689
------------ ------------
84,861,296 82,400,544
Accumulated depreciation and amortization (41,934,134) (38,481,591)
------------ ------------
$ 42,927,162 $ 43,918,953
5. TIME DEPOSITS:
--------------
Time deposits of $100,000 or more totaled approximately $162,772,000 and
$155,553,000 at December 31, 1998 and 1997, respectively. Interest expense on
these deposits was approximately $8,705,000, $8,322,000, and $7,268,000 during
1998, 1997, and 1996, respectively.
6. NOTE PAYABLE:
-------------
Bankshares has a line of credit with a non-affiliated bank under which it
can borrow up to $18,000,000. The line of credit is unsecured and matures on
June 30, 1999. Bankshares paid no fee to secure the unused line of credit and,
accordingly, did not estimate a fair value of the unused line of credit at
December 31, 1998 and 1997. In September 1997, Bankshares borrowed $6,200,000
under the line of credit at the London Interbank Offering Rate plus 1.0% (6.8%
at December 31, 1997). Interest was payable quarterly beginning December 31,
1997, with principal due in twenty quarterly installments beginning September
30, 1998. Bankshares repaid all borrowings under the line of credit in September
1998.
7. INCOME TAXES:
-------------
The Company files a consolidated federal income tax return. Income tax
expense (benefit) is comprised of the following:
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- ----------
Current federal income tax $11,221,938 $10,706,806 $9,614,232
Deferred federal income tax (110,993) (144,067) 269,834
----------- ----------- ----------
Income tax expense $11,110,945 $10,562,739 $9,884,066
=========== =========== ==========
F-16
The provision for income tax expense (benefit), as a percentage of pretax
earnings, differs from the statutory federal income tax rate as follows:
As a Percent of Pretax Earnings
---------------------------------------
1998 1997 1996
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Reductions in tax rate resulting from
interest income exempt from
federal income tax (3.1) (1.9) (1.3)
Other 0.4 0.3 0.5
---- ---- ----
Effective income tax rate 32.3% 33.4% 34.2%
==== ==== ====
The approximate effects of each type of difference that gave rise to the
Company's deferred tax assets and liabilities at December 31, 1998 and 1997, are
as follows:
1998 1997
----------- ----------
Deferred Tax Assets-
Tax basis of loans in excess of financial statement basis $ 2,624,001 $2,869,675
Benefits of a subsidiary bank net operating loss
carryforward 368,511 487,116
Recognized for financial reporting purposes but not
for tax purposes-
Deferred compensation 404,310 431,273
Write-downs and adjustments to other
real estate owned and repossessed assets 200,669 167,508
Other deferred tax assets 341,436 372,122
----------- ----------
Total deferred tax assets 3,938,927 4,327,694
Deferred Tax Liabilities-
Financial statement basis of fixed assets in excess of
tax basis 1,557,765 1,824,059
Recognized for financial reporting purposes but not
for tax purposes-
Accretion on investments 207,828 316,976
Pension plan contribution 535,436 528,526
Net unrealized gain on investment in securities
available-for-sale 819,209 216,369
Other deferred tax liabilities 115,224 203,669
----------- ----------
Total deferred tax liabilities 3,235,462 3,089,599
Valuation allowance (34,094) (76,877)
----------- ----------
Net deferred tax asset $ 669,371 $1,161,218
=========== ==========
F-17
At December 31, 1998, The First National Bank in Cleburne ("Cleburne"), a
subsidiary bank, had a net operating loss carryforward for federal income tax
purposes of approximately $1,053,000. In its consolidated return, subject to
certain yearly limitations, the Company can utilize Cleburne's pre-acquisition
net operating loss carryforward to offset future consolidated taxable income
only to the extent Cleburne has future taxable income. If not used, the net
operating loss carryforward expires as follows: $128,000 in 2001, $560,000 in
2002, and $365,000 in 2005.
The valuation allowance was established to recognize the uncertainty of
realization of the benefit related to Cleburne's net operating loss
carryforward. The following summarizes the changes in the allowance account:
1998 1997
--------- ---------
Valuation allowance at beginning of period $ 76,877 $137,232
Reduction in valuation allowance based on
current period utilization of net operating
loss carryforward (42,783) (60,355)
--------- ---------
Valuation allowance at end of period $ 34,094 $ 76,877
========= =========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The Company is required to disclose the estimated fair value of its
financial instrument assets and liabilities. For the Company, as for most
financial institutions, over 90% of its assets and liabilities are considered
financial instruments as defined by generally accepted accounting principles.
Many of the Company's financial instruments, however, lack an available trading
market as characterized by a willing buyer and willing seller engaging in an
exchange transaction.
Estimated fair values have been determined by the Company using the best
available data, as generally provided in the Company's Regulatory Reports, and
an estimation methodology suitable for each category of financial instruments.
For those loans and deposits with floating interest rates, it is presumed that
estimated fair values generally approximate the recorded book balances. The
estimation methodologies used, the estimated fair values, and recorded book
balances at December 31, 1998 and 1997, were as follows:
o Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
Estimated Recorded
Fair Book
Value Balance
------------------------------ -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Cash and due from banks $ 84,237,577 $ 94,543,508 $ 84,237,577 $ 94,543,508
Federal funds sold 116,091,417 121,220,839 116,091,417 121,220,839
Interest-bearing deposits in banks 203,911 398,671 203,911 398,671
Investment in securities 630,840,188 618,490,528 625,890,869 616,018,447
F-18
o Financial instruments with stated maturities have been valued using
a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities.
Financial instrument assets with variable rates and financial
instrument liabilities with no stated maturities have an estimated
fair value equal to both the amount payable on demand and the
recorded book balance.
Estimated Recorded
Fair Book
Value Balance
----------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Deposits with stated maturities $536,329,398 $529,674,980 $533,565,174 $529,025,182
Deposits with no stated maturities 971,290,666 959,683,546 971,290,666 959,683,546
Net loans 776,056,313 734,487,013 770,555,967 732,823,332
Note payable - 4,700,000 - 4,700,000
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
The Company's remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Company's deposits is required nor has the Company estimated its value. There is
no material difference between the notional amount and the estimated fair value
of off-balance-sheet unfunded loan commitments which total approximately
$195,719,000 and $167,953,000 at December 31, 1998 and 1997, respectively, and
are generally priced at market at the time of funding. Letters of credit
discussed in Note 10 have an estimated fair value based on fees currently
charged for similar agreements. At December 31, 1998 and 1997, fees related to
the unexpired term of the letters of credit are not significant.
Reasonable comparability between financial institutions may not be likely
due to the wide range of permitted valuation techniques and numerous estimates
which must be made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
9. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company is engaged in legal actions arising from the normal course of
business. In management's opinion, the Company has adequate legal defenses with
respect to these actions, and the resolution of these matters should have no
material adverse effects upon the results of operations or financial condition
of the Company.
The Company is a lessor for portions of its banking premises. Total rental
income for all leases included in net occupancy expense is approximately
$1,436,000, $1,341,000, and $1,262,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
--------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet.
F-19
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Contract or
Notional Amount
Financial instruments whose contract amounts
represent credit risk-
Commitments to extend credit $195,719,000
Standby letters of credit 5,538,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
Management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The average collateral value held on
letters of credit exceeds the contract amount.
11. CONCENTRATION OF CREDIT RISK:
-----------------------------
The Company grants commercial, retail, agriculture, and residential loans
to customers primarily in North Central and West Texas. Although the Company has
a diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the local economic sector.
12. PENSION AND PROFIT SHARING PLANS:
---------------------------------
The Company has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and a percentage of
the employee's qualifying compensation during the final years of employment. The
Company's funding policy is to contribute annually the amount necessary to
satisfy the Internal Revenue Service's funding standards. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
F-20
The following table provides a reconciliation of the plan's benefit
obligations and fair value of plan assets over the two-year period ending
December 31, 1998, and a statement of the funded status as of December 31, 1998
and 1997:
1998 1997
---------- ----------
Reconciliation of benefit obligations:
Benefit obligation at January 1 $ 8,279,256 $7,292,311
Service cost - benefits earned during the period 690,383 636,371
Interest cost on projected benefit obligation 637,149 560,262
Plan amendment for retirees 283,779 -
Actuarial loss 1,007,861 170,991
Benefits paid (522,217) (380,679)
---------- ----------
Benefit obligation at December 31 10,376,211 8,279,256
---------- ----------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 9,583,507 8,302,751
Actual return on plan assets 338,264 1,359,401
Employer contributions 581,493 302,034
Benefits paid (522,217) (380,679)
---------- ----------
Fair value of plan at December 31 9,981,047 9,583,507
---------- ----------
Funded status:
Funded status at December 31 (395,164) 1,304,251
Unrecognized loss from past experience different
than that assumed and effects of changes in
assumptions 1,645,964 109,065
Unrecognized prior-service cost 265,818 -
---------- ----------
Net amount recognized (prepaid pension cost included
in other assets) $1,516,618 $1,413,316
========== ==========
Net periodic pension cost for the years ended December 31, 1998, 1997, and
1996, included the following components:
Year Ended December 31,
---------------------------------------------
1998 1997 1996
--------- ----------- --------
Service cost - benefits earned during the period $ 690,383 $ 636,371 $622,939
Interest cost on projected benefit obligation 637,149 560,262 491,279
Expected return on plan assets (867,303) (730,486) (663,770)
Amortization of transition asset - (131,387) (142,204)
Amortization of prior-service cost 17,961 - -
--------- ----------- --------
Net periodic pension cost $ 478,190 $ 334,760 $308,244
========= =========== ========
F-21
The following table sets forth the rates used in the actuarial calculations
of the present value of benefit obligations and the rate of return on plan
assets:
1998 1997 1996
---- ---- ----
Weighted average discount rate 6.75% 7.5% 7.5%
Rate of increase in future compensation levels 4% 4% 4%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
As of December 31, 1998 and 1997, the fair value of the plan's assets
included Company stock valued at $345,000 and $384,000, respectively.
The Company's pension plan was amended as of February 1, 1998, to increase
benefit payments to retired participants. The effect of the amendment was to
increase the pension benefit obligation by $283,779. The prior-service costs
related to the amendment are amortized on a straight-line basis over the average
remaining service period of the active participants.
The Company also provides a profit sharing plan, which covers substantially
all full-time employees. The profit sharing plan is a defined contribution plan
and allows employees to contribute up to 5% of their base annual salary.
Employees are fully vested to the extent of their contributions and become fully
vested in the Company's contributions over a seven-year period. Costs related to
the Company's defined contribution plan totaled $2,027,220, $1,823,770, and
$1,719,884, in 1998, 1997, and 1996, respectively.
13. DIVIDENDS FROM SUBSIDIARIES:
----------------------------
At December 31, 1998, approximately $13,800,000 was available for the
declaration of dividends by the Company's subsidiary banks without the prior
approval of regulatory agencies.
14. REGULATORY MATTERS:
-------------------
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, each of
Bankshares' subsidiaries must meet specific capital guidelines that involve
quantitative measures of the subsidiaries' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
subsidiaries' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and each of its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined), to average assets (as defined). Management believes as of December 31,
1998 and 1997, that Bankshares and each of its subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 1998 and 1997, the most recent notification from each
respective subsidiaries' primary regulator categorized each of Bankshares'
subsidiaries as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
F-22
notification that Management believes have changed the institutions' category.
Bankshares' and its significant subsidiaries' actual capital amounts and ratios
are presented in the table below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --- -------------- ----- -------------- ------
As of December 31, 1998:
Total Capital
(to Risk-Weighted Assets):
Consolidated $ 155,108,000 17% =>$ 72,945,000 => 8% N/A N/A
First National Bank of Abilene $ 55,164,000 16% =>$ 26,864,000 => 8% =>$ 33,580,000 => 10%
San Angelo National Bank $ 24,291,000 17% =>$ 11,680,000 => 8% =>$ 14,599,000 => 10%
Weatherford National Bank $ 15,667,000 18% =>$ 7,083,000 => 8% =>$ 8,853,000 => 10%
Tier I Capital
(to Risk-Weighted Assets):
Consolidated $ 146,119,000 16% =>$ 36,472,000 => 4% N/A N/A
First National Bank of Abilene $ 51,952,000 15% =>$ 13,432,000 => 4% =>$ 20,148,000 => 6%
San Angelo National Bank $ 23,018,000 16% =>$ 5,840,000 => 4% =>$ 8,760,000 => 6%
Weatherford National Bank $ 14,844,000 17% =>$ 3,541,000 => 4% =>$ 5,312,000 => 6%
Tier I Capital
(to Average Assets):
Consolidated $ 146,119,000 9% =>$ 48,585,000 => 3% N/A N/A
First National Bank of Abilene $ 51,952,000 9% =>$ 17,764,000 => 3% =>$ 29,606,000 => 5%
San Angelo National Bank $ 23,018,000 9% =>$ 8,046,000 => 3% =>$ 13,410,000 => 5%
Weatherford National Bank $ 14,844,000 9% =>$ 5,019,000 => 3% =>$ 8,364,000 => 5%
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets):
Consolidated $ 141,332,000 16% =>$ 70,845,000 => 8% N/A N/A
First National Bank of Abilene $ 53,559,000 16% =>$ 26,999,000 => 8% =>$ 33,749,000 => 10%
San Angelo National Bank $ 20,746,000 16% =>$ 10,651,000 => 8% =>$ 13,314,000 => 10%
Weatherford National Bank $ 15,026,000 18% =>$ 6,572,000 => 8% =>$ 8,214,000 => 10%
Tier I Capital
(to Risk-Weighted Assets):
Consolidated $ 131,044,000 15% =>$ 35,422,000 => 4% N/A N/A
First National Bank of Abilene $ 49,341,000 15% =>$ 13,500,000 => 4% =>$ 20,249,000 => 6%
San Angelo National Bank $ 19,081,000 14% =>$ 5,326,000 => 4% =>$ 7,988,000 => 6%
Weatherford National Bank $ 14,221,000 17% =>$ 3,286,000 => 4% =>$ 4,929,000 => 6%
Tier I Capital
(to Average Assets):
Consolidated $ 131,044,000 8% =>$ 47,291,000 => 3% N/A N/A
First National Bank of Abilene $ 49,341,000 8% =>$ 17,473,000 => 3% =>$ 29,121,000 => 5%
San Angelo National Bank $ 19,081,000 7% =>$ 7,871,000 => 3% =>$ 13,118,000 => 5%
Weatherford National Bank $ 14,221,000 9% =>$ 4,675,000 => 3% =>$ 7,791,000 => 5%
F-23
15. LOANS TO RELATED PARTIES:
-------------------------
An analysis of the changes in loans to officers, directors, principal
shareholders, or associates of such persons for the years ended December 31,
1998 and 1997, (determined as of each respective year-end) follows:
Balance at Balance at
Beginning Additional End
of Period Loans Payments of Period
----------- ----------- ----------- -----------
Year ended December 31, 1998 $40,965,711 $49,520,091 $41,962,879 $48,522,922
=========== =========== =========== ===========
Year ended December 31, 1997 $50,471,511 $79,857,332 $84,313,597 $46,015,246
=========== =========== =========== ===========
In the opinion of management, those loans are on substantially the same
terms, including interest rates and collateral requirements, as those prevailing
at the time for comparable transactions with unaffiliated persons.
16. STOCK OPTION PLAN:
------------------
The Company has an incentive stock plan to provide for the granting of
options to senior management of the Company at prices not less than market at
the date of grant. At December 31, 1998, the Company had allocated 317,757
shares of stock for issuance under the plan. The plan provides that options
granted are exercisable after two years from date of grant at a rate of 20% each
year cumulatively during the 10-year term of the option. An analysis of stock
option activity for the years ended December 31, 1998, 1997, and 1996, is
presented in the table and narrative below:
1998 1997 1996
------------------- ------------------- -------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------- ------ ------- ------ ------- ------
Outstanding, beginning of year 124,739 $16.79 165,810 $14.44 231,410 $12.44
Granted 45,430 36.59 4,813 28.36 - -
Exercised (24,830) 11.81 (40,848) 8.46 (62,508) 7.35
Canceled (8,631) 24.89 (5,036) 17.90 (3,092) 16.28
------- ------ ------- ------ ------- ------
Outstanding, end of year 136,708 $23.76 124,739 $16.79 165,810 $14.44
======= ====== ======= ====== ======= ======
Exercisable at end of year 54,435 $15.77 45,064 $12.51 44,846 $ 8.68
======= ====== ======= ====== ======= ======
Weighted average fair value of
options granted at date of issue $10.92 $10.84 $ -
====== ====== ========
The options outstanding at December 31, 1998, have exercise prices between
$8.45 and $36.59 with a weighted average exercise price of $23.76 and a weighted
average remaining contractual life of 7 years. Stock options have been adjusted
retroactively for the effects of stock dividends and splits.
The Company accounts for this plan under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options granted. Had compensation cost
for the plan been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
earnings and earnings per share would have been reduced by immaterial amounts on
a pro forma basis for the years ended December 31, 1998 and 1997. The fair value
of the options granted in 1998 and 1997 was estimated using an accepted options
pricing model with the following weighted-average assumptions: risk-free
F-24
interest rate of 5.86%; expected dividend yield of 2.48%; expected life of 5.0
years; and expected volatility of 27.81% for the 1998 grant and 29.49% for the
1997 grant.
17. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
-------------------------------------------------
Condensed Balance Sheets-December 31, 1998 and 1997
- ---------------------------------------------------
ASSETS 1998 1997
------ ------------ ------------
Cash in subsidiary bank $ 638,625 $ 1,116,419
Interest-bearing deposits in banks 4,958,496 3,700,876
------------ ------------
Total cash and cash equivalents 5,597,121 4,817,295
Investment in subsidiaries, at equity 165,903,291 156,058,637
Goodwill, net 890,103 894,715
Other assets 950,244 590,487
------------ ------------
Total assets $173,340,759 $162,361,134
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Total liabilities $ 3,891,501 $ 7,899,928
Shareholders' equity-
Common stock 99,526,830 90,258,520
Capital surplus 60,375,373 36,595,698
Retained earnings 8,015,303 27,203,391
Unrealized gain on investment in securities available-for-sale, net 1,531,752 403,597
------------ ------------
Total shareholders' equity 169,449,258 154,461,206
------------ ------------
Total liabilities and shareholders' equity $173,340,759 $162,361,134
============ ============
Condensed Statements of Earnings-
For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Income-
Cash dividends from subsidiary banks $15,500,000 $16,350,000 $19,000,000
Excess of earnings over dividends of subsidiary banks 8,716,499 5,083,830 563,347
Other income 640,633 1,377,445 975,944
----------- ----------- -----------
24,857,132 22,811,275 20,539,291
----------- ----------- -----------
Expenses-
Salaries and employee benefits 1,002,919 1,220,436 1,118,226
Other operating expenses 1,098,817 753,649 625,030
----------- ----------- -----------
2,101,736 1,974,085 1,743,256
----------- ----------- -----------
Earnings before income taxes 22,755,396 20,837,190 18,796,035
Income tax benefit 498,543 189,269 246,677
----------- ----------- -----------
Net earnings $23,253,939 $21,026,459 $19,042,712
=========== =========== ===========
F-25
Condensed Statements of Cash Flows-
For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
------------ ------------ -------------
Cash flows from operating activities-
Net earnings $23,253,939 $21,026,459 $19,042,712
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Excess of earnings over
dividends of subsidiary banks (8,716,499) (5,083,830) (563,347)
Depreciation 31,269 38,802 42,130
Discount accretion, net of premium
amortization (15,117) (730,260) (381,799)
Amortization of goodwill 53,090 46,135 46,135
(Increase) decrease in other assets (390,985) (204,916) 169,028
Increase (decrease) in liabilities 117,783 237,572 (138,267)
------------ ------------ -------------
Net cash provided by operating
activities 14,333,480 15,329,962 18,216,592
------------ ------------ -------------
Cash flows from investing activities-
Capital expenditures (48,519) (54,638) (19,031)
Capital contribution to subsidiary - (28,000,000) -
Cash payment for stock in acquisition - - (13,097,678)
Cash acquired in acquisition - 316,500 -
Proceeds from maturities of securities 1,510,000 74,088,129 37,450,000
Purchases of securities (1,494,883) (54,711,342) (35,893,703)
------------ ------------ -------------
Net cash used in investing activities (33,402) (8,361,351) (11,560,412)
------------ ------------ -------------
Cash flows from financing activities-
Proceeds of stock issuances 293,427 345,920 432,013
Proceeds from debt - 6,200,000 -
Repayments of debt (4,700,000) (1,500,000) -
Cash dividends paid (9,113,679) (7,993,195) (6,980,052)
------------ ------------ -------------
Net cash used in financing activities (13,520,252) (2,947,275) (6,548,039)
------------ ------------ -------------
Net increase in cash and cash equivalents 779,826 4,021,336 108,141
Cash and cash equivalents at beginning of
the year 4,817,295 795,959 687,818
------------ ------------ -------------
Cash and cash equivalents at end of the year $ 5,597,121 $ 4,817,295 $ 795,959
============ ============ =============
18. BUSINESS COMBINATIONS:
----------------------
In December 1998, the Company exchanged 411,683 shares of its common stock
for substantially all of the outstanding shares of Cleburne State Bank
("Cleburne State"). The Cleburne State shareholders received 2.1073 shares of
the Company's common stock for each share of Cleburne State common stock owned.
The accompanying consolidated financial statements of the Company give effect to
this business combination which has been accounted for as a
pooling-of-interests. Accordingly, the accounts of Cleburne State have been
combined with those of the Company to reflect the results of these companies on
a combined basis for all periods presented. Certain reclassifications of the
historical results of these companies have been made to conform with the current
presentation.
F-26
The Company's consolidated financial data for the years ended December 31,
1998, 1997 and 1996, have been restated as follows:
Cleburne
Company State Combined
----------- ---------- -----------
Year ended December 31, 1998
Net interest income $62,005,218 $3,570,049 $65,575,267
Net earnings 22,169,886 1,084,053 23,253,939
Year ended December 31, 1997
Net interest income 56,423,615 3,315,509 59,739,124
Net earnings 20,063,105 963,354 21,026,459
Year ended December 31, 1996
Net interest income 50,444,995 3,019,914 53,464,909
Net earnings 18,122,251 920,461 19,042,712
In November 1997, the Company exchanged 216,442 shares of its common stock
for all the outstanding shares of Southlake Bancshares, Inc. ("Southlake") and
its wholly-owned subsidiary, Texas National Bank. The Southlake shareholders
received 0.894 shares of the Company's common stock for each share of Southlake
common stock owned. The consolidated financial statements of the Company for
1997 give effect to the merger which was accounted for as a
pooling-of-interests. Due to immateriality, the transaction was recorded as an
adjustment to shareholders' equity as of January 1, 1997, without restating
balance sheets or statements of earnings for years prior to 1997.
In September 1997, the Company, through a bank subsidiary, acquired certain
assets of Texas Commerce Bank - San Angelo for $16,800,000 in cash, and the
assumption of certain liabilities (primarily deposits). The total purchase price
exceeded the fair market value of net assets acquired by approximately
$18,000,000, which was recorded by the Company as goodwill to be amortized using
a straight-line method over a period of 15 years.
In January 1996, the Company purchased substantially all of the outstanding
stock of Citizens Equity Corporation, Inc. ("Citizens") and its subsidiary,
Citizens National Bank of Weatherford, for approximately $7,500,000 in cash,
along with the assumption of Citizens' debt of approximately $5,600,000. The
total purchase price exceeded the fair market value of net assets acquired by
approximately $4,900,000, which was recorded by the Company as goodwill to be
amortized using a straight-line method over a period of 15 years.
In January 1996, the Company exchanged 323,002 shares of its common stock
for all of the outstanding shares of Weatherford National Bancshares, Inc.
("Weatherford") and its wholly owned subsidiary, Weatherford National Bank. The
Weatherford shareholders received 1.5 shares of the Company's common stock for
each share of Weatherford common stock owned. This business combination was
accounted for as a pooling-of-interests. Accordingly, the accounts of
Weatherford have been combined with those of the Company to reflect the results
of these companies on a combined basis.
F-27
19. CASH FLOW INFORMATION:
----------------------
Supplemental information on cash flows and noncash transactions is as
follows:
Year Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
Supplemental cash flow information-
Interest paid $46,486,952 $40,902,991 $35,857,398
Federal income taxes paid 11,259,747 10,319,430 9,397,024
Schedule of noncash investing and financing activities-
Debt assumed in acquisition - 5,600,000 5,555,017
Assets acquired through foreclosure 78,720 40,585 77,631
Purchase business combinations-
Assets acquired - 85,044,000 98,200,000
Liabilities assumed - 155,747,000 90,700,000
Cash paid for stock - - 7,500,000
F-28
EXHIBIT INDEX
Item 601
Regulation S-K
Exhibit Reference
Number Description
- ------ -------------------------------------------------------------
2.1 -- Stock Exchange Agreement and Plan of Reorganization, dated as
of September 4, 1998, between First Financial Bankshares,
Inc. and Cleburne State Bank (incorporated by reference from
Exhibit 2.1 of the Registrant's Form S-4, filed on October
2, 1998 (Reg. No. 333-65235)).
2.2 -- Amendment No. 1 to Stock Exchange Agreement and Plan of
Reorganization, dated as of October 30, 1998, between First
Financial Bankshares, Inc. and Cleburne State Bank
(incorporated by reference from Exhibit 2.2 of the
Registrant's Amendment No. 1 to Form S-4, filed on November
3, 1998 (Reg. No. 333-65235)).
2.3 -- Stock Exchange Agreement and Plan of Reorganization, dated
as of August 18, 1997, between First Financial Bankshares,
Inc., Southlake Bancshares, Inc. and Texas National Bank
(incorporated by reference from Exhibit 2.1 of the
Registrant's Form S-4, filed on October 1, 1997
(Reg. No. 333-36919)).
2.4 -- Purchase and Assumption Agreement, dated May 27, 1997, by
and between Southwest Bank of San Angelo and Texas Commerce
Bank-- San Angelo, National Association (incorporated by
reference from Exhibit 2.2 of the Registrant's Form S-4,
filed on October 1, 1997 (Reg. No. 333-36919)).
3.1 -- Articles of Incorporation, and all amendments thereto,
of the Registrant(incorporated by reference from Exhibit 1
of the Registrant's Amendment No. 2 to Form 8-A filed on
Form 8-A/A No. 2 on November 21, 1995).
3.2 -- Amended and Restated Bylaws, and all amendments thereto,
of the Registrant (incorporated by reference from Exhibit
2 of the Registrant's Amendment No. 1 to Form 8-A filed on
Form 8-A/A No. 1 on January 7, 1994).
4.1 -- Specimen certificate of First Financial Common Stock
(incorporated by reference from Exhibit 3 of the Registrant's
Amendment No. 1 to Form 8-A filed on Form 8-A/A No. 1 on
January 7, 1994).
10.1 -- Deferred Compensation Agreement, dated October 28, 1992,
between Bankshares and Kenneth T. Murphy (incorporated by
reference from Exhibit 4 of the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1992).
10.2 -- Revised Deferred Compensation Agreement, dated December
28, 1995, between Bankshares and Kenneth T. Murphy
(incorporated by reference from Exhibit 2 of the Registrant's
Form 10-K Annual Report for the fiscal year ended December
31, 1995).
10.3 -- Executive Recognition Plan (incorporated by reference
from Exhibit 2 of the Registrant's Form 10-K Annual Report
for the fiscal year ended December 31, 1996).
10.4 -- Form of Executive Recognition Agreement (incorporated by
reference from Exhibit 3 of the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1996).
10.5 -- 1992 Incentive Stock Option Plan.
21.1 -- Subsidiaries of the Registrant.
24.1 -- Power of Attorney (included on signature page of this
Form 10-K).
I-1
Item 601
Regulation S-K
Exhibit Reference
Number Description
- ------ -------------------------------------------------------------
27.1 -- Financial Data Schedule (included in SEC-filed copy only.)
I-2
EXHIBIT 10.5
1992 INCENTIVE STOCK OPTION PLAN
FOR KEY EMPLOYEES OF
FIRST FINANCIAL BANKSHARES, INC.
AND ITS SUBSIDIARIES
FIRST FINANCIAL BANKSHARES, INC.
1992 INCENTIVE STOCK OPTION PLAN
1. Purpose.
The purpose of the Plan is to attract and retain employees to First
Financial Bankshares, Inc., a Texas corporation (the "Corporation"), and to its
Subsidiaries (hereafter defined) and to provide such persons and employees of
the Corporation and its Subsidiaries with a proprietary interest in the
Corporation through the granting of Stock Options and related Stock Appreciation
Rights that will
(a) increase the interest of the employees in the Corporation's welfare;
(b) furnish an incentive to the employees to continue their services for
the Corporation; and
(c) provide a means through which the Corporation may attract able persons
to enter its employ.
2. Definitions.
For the purpose of this Plan, unless the context requires otherwise,
the following terms shall have the meanings indicated:
(a) "Board" means the board of directors of the Corporation.
(b) "Change in Control" means the occurrence of any of the following events:
(i) there shall be consummated (x) any consolidation or merger of the
Corporation in which the Corporation is not the continuing or surviving
corporation or pursuant to which shares of the Corporation's Common Stock
would be converted into cash, securities or other property, other than a
merger of the Corporation in which the holders of the Corporation's Common
Stock immediately prior to the merger have the same proportionate ownership
of common stock of the surviving corporation immediately after the merger,
or (y) any sale, lease, exchange or other transfer (excluding transfer by
way of pledge or hypothecation), in one transaction or a series of related
transactions, of all, or substantially all, of the assets of the
Corporation, (ii) the stockholders of the Corporation approve any plan or
proposal for the liquidation or dissolution of the Corporation, (iii) any
"person" (as such term is defined in Section 3(a)(9) or Section 13(d)(3)
under the 1934 Act or any "group" (as such term is used in Rule 13d-5
promulgated under the 1934 Act), other than the Corporation or any
successor of the Corporation or any Subsidiary of the Corporation or any
employee benefit plan of the Corporation or any Subsidiary (including such
plan's trustee), becomes a beneficial owner for purposes of Rule 13d-3
promulgated under the 1934 Act, directly or indirectly, of securities of
the Corporation representing 50.1% or more of the Corporation's then
outstanding securities having the right to vote in the election of
directors, or (iv) during any period of two consecutive years, individuals
who, at the beginning of such period constituted the entire Board, cease
for any reason (other than death) to constitute a majority of the
directors, unless the election, or the nomination for election, by the
Corporation's stockholders, of each new director was approved by a vote of
at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" means the common stock which the Corporation is currently
authorized to issue or may in the future be authorized to issue.
(e) "Corporation" means First Financial Bankshares, Inc., a Texas corporation.
(f) "Date of Grant" means the effective date on which a Stock Option or related
Stock Appreciation Right is awarded to an employee or director as set forth
in the stock option agreement.
(g) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(h) "Option Period" means the period during which a Stock Option or related
Stock Appreciation Right may be exercised.
(i) "Participant" means any employee or director of the Corporation or a
Subsidiary who is, or who is proposed to be, a recipient of a Stock Option
or related Stock Appreciation Right.
(j) "Plan" means this Incentive Stock Option Plan as amended from time to time.
(k) "Stock Appreciation Right" means a right to receive cash equal to the
excess fair market value of the Common Stock granted to a Participant under
this Plan.
(l) "Stock Option" means an option to purchase Common Stock of the Corporation
granted to a Participant under this Plan and which is intended to qualify
as an incentive stock option under Section 422 of the Code.
(m) "Subsidiary" means any corporation in an unbroken chain of corporations
beginning with the Corporation if, at the time of the granting of the Stock
Option or related Stock Appreciation Right, each of the corporations other
than the last corporation in the unbroken chain owns stock possessing 50%
or more of the total combined voting power of all classes of stock in one
of the other corporations in the chain, and "Subsidiaries" means more than
one of any such corporations.
3. Administration.
Subject to the terms of this Paragraph 3, the Plan shall be
administered by the Stock Option Committee (the "Committee") of the Board which
shall consist of at least three members. Any member of the Committee may be
removed at any time, with or without cause, by resolution of the Board. Any
vacancy occurring in the membership of the Committee may be filled by
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appointment by the Board. Each member of the Committee, at the time of his
appointment to the Committee and while he is a member thereof, must be
"disinterested," as defined in Rule 16b-3 promulgated under the 1934 Act or any
predecessor provision thereto, as applicable.
The Committee shall select one of its members to act as its Chairman,
and shall make such rules and regulations for its operation as it deems
appropriate. A majority of the Committee shall constitute a quorum and the act
of a majority of the members of the Committee present at a meeting at which a
quorum is present shall be the act of the Committee. Subject to the terms
hereof, the Committee shall designate from time to time the key employees to
whom Stock Options or Stock Appreciation Rights will be granted, interpret the
Plan, prescribe, amend and rescind any rules and regulations necessary or
appropriate for the administration of the Plan, and make such other
determinations and, subject to the terms of the Plan, take such other action as
it deems necessary or advisable. In this regard, the Committee shall consider
and give appropriate weight to input from representatives of management of the
Corporation regarding the contributions or potential contributions to the
Corporation of certain of the employees or potential employees of the
Corporation. Except as provided below, any interpretation, determination or
other action made or taken by the Committee shall be final, binding and
conclusive on all interested parties, including the Corporation and all
Participants.
4. Eligibility.
Any employee of the Corporation or its Subsidiaries whose judgment,
initiative and efforts contributed or may be expected to contribute to a
successful performance of the Corporation is eligible to participate in the
Plan. Non-employee directors shall not be eligible to receive Stock Options
under the Plan.
5. Shares Subject to Plan.
The Board may not grant Stock Options or related Stock Appreciation
Rights under the Plan for more than 100,000 shares of Common Stock of the
Corporation (as may be adjusted in accordance with Section 22 hereof). Shares to
be optioned and sold may be made available from either authorized but unissued
Common Stock or Common Stock held by the Corporation in its treasury. Shares
that by reason of the expiration of a Stock Option or otherwise are no longer
subject to purchase pursuant to a Stock Option granted under the Plan may be
reoffered under the Plan.
6. Stock Ownership Limitation for Options.
No Stock Option may be granted to an employee who owns more than 10% of
the total combined voting power of all classes of stock of the Corporation or
its Subsidiaries. This limitation will not apply if the Stock Option price is at
least 110% of the fair market value of the Common Stock on the Date of Grant and
such Stock Option by its terms is not exercisable after the expiration of five
(5) years from the Date of Grant.
7. Limitation on Exercises and Grants of Options.
To the extent required by the Code, the exercise of Stock Options
granted under the Plan shall be subject to the $100,000 calendar-year limit set
forth in Section 422(d) of the Code.
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The aggregate fair market value (determined as of the Date of Grant) of
the stock for which any Participant may be granted Stock Options in any calendar
year under the Plan shall not exceed the sum of (i) $100,000, plus (ii) any
"unused limit carryover" (as defined in Section 422A(c)(4) of the Code, as it
provided prior to its being repealed in Section 321(a) of Public Law 99-514) to
such year.
8. Allotment of Shares.
The Committee shall determine the number of shares of Common Stock to
be offered from time to time by grant of Stock Options or Stock Appreciation
Rights to Participants under the Plan. The grant of a Stock Option or Stock
Appreciation Right to a Participant shall not be deemed either to entitle the
Participant to, or to disqualify the Participant from, participation in any
other grant of Stock Options or Stock Appreciation Rights under the Plan.
9. Grant of Options and Stock Appreciation Rights.
The grant of Stock Options or related Stock Appreciation Rights shall
be evidenced by stock option agreements setting forth such terms and provisions
as are approved by the Committee, but not inconsistent with the Plan, including
provisions that may be necessary to assure that the Stock Option is an incentive
stock option under the Code. The Corporation shall execute stock option
agreements with the Participants after approval of the issuance of Stock Options
or Stock Appreciation Rights. The Plan shall be submitted to the Corporation's
stockholders for approval; however, the Board may grant Stock Options or Stock
Appreciation Rights under the Plan prior to the time of stockholder approval.
10. Option Price.
The option price for each Stock Option shall not be less than 100% of
the fair market value per share of the Common Stock on the Date of Grant. The
Committee shall determine the fair market value of the Common Stock on the Date
of Grant and shall set forth the determination in its minutes, using any
reasonable valuation method.
11. Option Period for Options and Stock Appreciation Rights.
The Option Period for each Stock Option and Stock Appreciation Right
will begin and terminate on the dates specified by the Committee, but may not
terminate later than ten years from the Date of Grant. No Stock Option or Stock
Appreciation Right granted under the Plan may be exercised at any time after its
term. The Committee may provide for exercise of Stock Options or Stock
Appreciation Rights immediately or in installments and upon such other terms,
conditions and restrictions as it may determine, including granting the
Corporation the right to repurchase shares issued upon exercise of options.
12. Payment of Option Price.
Full payment for shares purchased upon exercise of a Stock Option shall
be made in cash, or at the option of the Committee by the Participant's delivery
to the Corporation of previously-acquired shares of Common Stock which have a
fair market value equal to the option price, or in any combination of cash and
shares of Common Stock having an aggregate fair market value equal to the option
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price. In the event the Committee determines to permit a Participant to purchase
shares pursuant to the exercise of an option hereunder with previously-acquired
shares, the Committee may permit the Participant to use shares which he either
purchased in the open market or acquired upon the exercise of options under the
Plan or any other stock option plan of the Company, including options for which
the purchase price was paid, in full or in part, with previously-acquired
shares.
No shares may be issued until full payment of the purchase price
therefor has been made, and a Participant will have none of the rights of a
stockholder until shares are issued to him.
13. Exercise of Option and Stock Appreciation Rights.
Each Stock Option and any Stock Appreciation Right granted under the
Plan may be exercised during the Option Period, at such times and in such
amounts, in accordance with the terms and conditions and subject to such
restrictions as are set forth in the applicable stock option agreements; except
that no Stock Option or Stock Appreciation Right granted hereunder to a
Participant shall be exercisable while there is outstanding any Stock Option or
Stock Appreciation Right previously granted to a Participant. Except as provided
in paragraph 16 below, no Stock Option or Stock Appreciation Right may be
exercised at any time unless the Participant is employed by the Corporation or a
Subsidiary and has continuously remained an employee at all times since the Date
of Grant. If the Committee imposes conditions upon exercise, then subsequent to
the Date of Grant the Committee may, also in its sole discretion, accelerate the
date on which all or any portion of the Stock Options or related Stock
Appreciation Rights may be exercised. In no event may a Stock Option be
exercised or shares be issued pursuant to an option if any necessary listing of
the shares on a stock exchange or any registration under state or federal
securities laws required under the circumstances has not been accomplished.
14. Stock Appreciation Rights.
Any Stock Option granted under the Plan may, in the discretion of the
Committee, include a Stock Appreciation Right. Each Stock Appreciation Right
shall be related to a specific Stock Option granted under the Plan, shall be
granted concurrently with the Stock Option to which it relates and shall not be
exercisable to any greater extent than the related Stock Option is exercisable.
A Stock Appreciation Right shall entitle the Participant at his
election to surrender to the Corporation the Stock Option, or portion thereof,
as the Participant shall choose, and to receive from the Corporation in exchange
therefor cash in an amount equal to the excess (if any) of the fair market value
(as of the date of the exercise of the Stock Appreciation Right) of one share
over the purchase price per share specified in such Stock Option, multiplied by
the total number of shares called for by the Stock Option, or portion thereof,
which is so surrendered. In the discretion of the Committee, the Corporation
shall be entitled to elect instead to settle its obligation arising out of the
exercise of a Stock Appreciation Right, by the distribution of that number of
shares of Common Stock having an aggregate fair market value (as of the date of
the exercise of the Stock Appreciation Right) equal to the amount of cash it
would otherwise be obligated to pay, with a cash settlement to be made for any
fractional share interests, or the Corporation may elect to settle such
obligations in part with stock and in part with cash.
-5-
The right of Participant to exercise a Stock Appreciation Right shall
be canceled if and to the extent the related Stock Option is exercised. The
right of a Participant to exercise a Stock Option shall be canceled if and to
the extent that shares covered by such Stock Option are used to calculate cash
or shares received upon exercise of a related Stock Appreciation Right.
The fair market value of Common Stock on the date of exercise of a
Stock Appreciation Right shall be determined as of such exercise date in the
same manner as the fair market value of Common Stock on the Date of Grant of
Stock is determined for purposes of paragraph 10 hereof.
15. Agreement to Serve.
Each Participant granted a Stock Option hereunder shall, as one of the
terms of the grant, as reflected in the stock option agreement, agree that he
will remain in the service of the Corporation or of one of its Subsidiaries for
a period of at least two years from the Date of Grant. Such service shall
(subject to the provisions of paragraph 16 hereof and to the terms of any
contract between the Corporation or any such Subsidiary and such employee) be at
the pleasure of the Board and at such compensation as the Board or any committee
thereof shall determine from time to time. Any termination of such Participant's
service during such period that is either (i) by the Corporation or such
Subsidiary for cause, or (ii) voluntary on the part of the individual and
without the written consent of the Corporation or such Subsidiary shall be
deemed a violation by the Participant of such agreement. In the event of such
violation, any Stock Option or Stock Appreciation Rights held by the Participant
under the Plan, to the extent not theretofore exercised, shall terminate.
Retirement at the normal retirement date as prescribed from time to time by the
Corporation or such Subsidiary shall be deemed to be a termination of employment
with consent.
16. Termination of Employment of Service.
In the event a Participant shall cease to be employed by the
Corporation or a Subsidiary, for any reason other than death, disability or
retirement, such Participant's Stock Options or related Stock Appreciation
Rights may be exercised by the Participant for a period of three (3) months
after the Participant's termination of employment or service, as the case may
be, or until expiration of the applicable Option Period (if sooner) to the
extent of the shares with respect to which such Stock Options or related Stock
Appreciation Rights could have been exercised by the Participant on the date of
termination, and thereafter to the extent not so exercised, such Stock Options
or related Stock Appreciation Rights shall terminate. In addition, a
Participant's Stock Options or related Stock Appreciation Rights may be
exercised as follows in the event of such Participant's death, disability or
retirement:
(a) Death. In the event of death while employed, all Stock Options
or related Stock Appreciation Rights outstanding shall be
exercisable for a period of twelve (12) months after the
Participant's death or until expiration of the applicable
Option Period (if sooner) to the extent of the shares with
respect to which the Stock Option or related Stock
Appreciation Rights could have been exercised by the
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Participant on the date of the Participant's death, and such
Stock Option or related Stock Appreciation Rights may only be
exercised by the personal representative of the Participant's
estate, or by the person who acquired the right to exercise
the Stock Option or related Stock Appreciation Rights by
bequest or inheritance or by reason of the Participant's
death; and
(b) Disability or Retirement. In the event of termination of
employment or service as the result of retirement or
disability (as defined in Section 22(e) of the Code), all
Stock Options or related Stock Appreciation Rights outstanding
shall be exercisable by the Participant or his guardian for a
period of twelve (12) months after such termination or until
expiration of the applicable Option Period (if sooner) to the
extent of the shares with respect to which the Stock Option or
related Stock Appreciation Rights could have been exercised by
the Participant on the date of such termination.
17. Disqualifying Disposition.
If stock acquired upon exercise of a Stock Option is disposed of by a
Participant prior to the expiration of either two years from the Date of Grant
of such option or one year from the transfer of shares to the Participant
pursuant to the exercise of such option, or in any other disqualifying
disposition within the meaning of Section 422 of the Code, such Participant
shall notify the Corporation in writing of the date and terms of such
disposition. A disqualifying disposition by a Participant shall not affect the
status of any other option granted under the Plan as an incentive stock option
within the meaning of the Section 422 of the Code.
18. Non-Assignability.
A Stock Option or a related Stock Appreciation Right granted to a
Participant may not be transferred or assigned, other than (i) by will or the
laws of descent and distribution or (ii) pursuant to the terms of a qualified
domestic relations order (as defined in Section 411(a)(13) of the Code or
Section 206(d)(3) of the Employee Retirement Income Security Act of 1974, as
amended) provided that in the case of a Stock Option, such transfer or
assignment may occur only to the extent it will not result in disqualifying such
option as an incentive stock option under Section 422 of the Code, or any other
successor provision. Subject to the foregoing, during a Participant's lifetime,
Stock Options granted to a Participant may be exercised only by the Participant
or, subject to the terms hereof, by the Participant's guardian or legal
representative.
19. Amendment or Discontinuance.
The Board may, without the consent of the Participants, alter, amend,
revise, suspend or discontinue the Plan without obtaining approval of the
Corporation's shareholders, provide such action shall not (i) materially
increase the benefits accruing to Participants under the Plan, (ii) materially
increase the number of securities which may be issued under the Plan, or (iii)
materially modify the requirements as to eligibility for Participation in the
Plan. Subject to the foregoing limitations, the Board may amend the Plan or
modify the agreements evidencing same in order to comply with any exemption from
the operation of Section 16(b) of the 1934 Act.
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20. Effect of the Plan.
Neither the adoption of this Plan nor any action of the Board or the
Committee shall be deemed to give any officer or employee any right to be
granted a Stock Option to purchase Common Stock of the Corporation or any other
rights except as may be evidenced by a stock option agreement, or any amendment
thereto, duly authorized by the Board and executed on behalf of the Corporation
and then only to the extent and upon the terms and conditions expressly set
forth therein.
21. Term.
Unless sooner terminated by action of the Board, the Plan will
terminate on January 28, 2002, but Stock Options and Stock Appreciation Rights
granted before that date will continue to be effective in accordance with their
terms and conditions.
22. Recapitalization, Merger and Consolidation.
(a) The existence of this Plan and Stock Options and Stock
Appreciation Rights granted hereunder shall not affect in any
way the right or power of the Corporation or its stockholders
to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the
Corporation's capital structure or its business, or any merger
or consolidation of the Corporation, or any issue of bonds,
debentures, preferred or preference stocks ranking prior to or
otherwise affecting the Common Stock or the rights thereof (or
any rights, options or warrants to purchase same), or the
dissolution or liquidation of the Corporation, or any sale or
transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar
character or otherwise.
(b) The number of shares of Common Stock available under the Plan
described in Section 5, the number of shares of Common Stock
that may be purchased pursuant to Stock Options granted under
the Plan, and the consideration payable per share upon
exercise may be proportionately adjusted by the Board, in its
sole discretion, for any increase or decrease in the number of
issued shares of Common Stock resulting from a subdivision or
consolidation of shares or other capital adjustment, or the
payment of a stock dividend or other increase or decease in
such shares, effected without receipt of consideration by the
Corporation; provided, however, that any fractional shares
resulting from any such adjustment shall be eliminated for the
purposes of such adjustment.
(c) Subject to any required action by the stockholders, if the
Corporation shall be the surviving or resulting corporation in
any merger or consolidation, any Stock Option and related
Stock Appreciation Rights granted hereunder shall pertain to
and apply to the securities or rights (including cash,
property or assets) to which a holder of the number of shares
of Common Stock subject to the Stock Option and related Stock
Appreciation Rights would have been entitled.
(d) In the event of any merger or consolidation pursuant to
which the Corporation is not the surviving or resulting
corporation, there shall be substituted for each share of
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Common Stock subject to the unexercised portions of such
outstanding Stock Options and related Stock Appreciation
Rights, that number of shares of each class of stock or other
securities or that amount of cash, property or assets of the
surviving or consolidated company which were distributed or
distributable to the stockholder of the Corporation in respect
to each share of Common Stock held by them, such outstanding
Stock Options and related Stock Appreciation Rights to be
thereafter exercisable for such stock securities, cash or
property in accordance with their terms. Notwithstanding the
foregoing, however, all such Stock Options and related Stock
Appreciation Rights may be canceled by the Corporation as of
the effective date of any such reorganization, merger or
consolidation or of any dissolution or liquidation of the
Corporation by giving notice to each holder thereof or his
personal representative of its intention to do so and by
permitting the purchase during the thirty (30) day period
next preceding such effective date of all of the shares
subject to such outstanding Stock Options and related Stock
Appreciation Rights.
(e) In the event that either sufficient shares of the
Corporation's Common Stock are purchased, or any tender,
exchange or similar offer is commenced which would, if
successful (i) result in any of the events described in
subsections 22(c) and (d), (ii) materially alter the structure
or business of the Corporation, or (iii) result in a Change in
Control of the Corporation, then, notwithstanding any other
provision in the Plan to the contrary, all unmatured
installments of Stock Options and related Stock Appreciation
Rights outstanding shall thereupon automatically be
accelerated and exercisable in full. The determination of the
Board that any of the foregoing conditions has been met shall
be binding and conclusive on all parties.
(f) Except as hereinbefore expressly provided, the issue by the
Corporation of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or
property, or for labor or services either upon direct sale or
upon the exercise of rights or warrants to subscribe therefor,
or upon conversion of shares or obligations of the Corporation
convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock
subject to Stock Options or Stock Appreciation Rights granted
pursuant to this Plan.
(g) Upon the occurrence of each event requiring an adjustment of
the exercise price or the number of shares purchasable
pursuant to Stock Options or Stock Appreciation Rights granted
pursuant to the terms of this Plan, the Corporation shall mail
forthwith to each Participant a copy of its computation of
such adjustment.
23. Liquidation or Dissolution.
In case the Corporation shall, at any time while any Stock Option or
Stock Appreciation Rights under this Plan shall be in force and remain
unexpired, (i) sell all or substantially all its property, or (ii) dissolve,
liquidate, or wind up its affairs, then each Participant may thereafter receive
upon exercise hereof (in lieu of each share of Common Stock of the Corporation
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which such Participant would have been entitled to receive) the same kind and
amount of any securities or assets as may be issuable, distributable or payable
upon any such sale, dissolution, liquidation, or winding up with respect to each
share of Common Stock of the Corporation. If the Corporation shall, at any time
prior to the expiration of any Stock Option, make any partial distribution of
its assets, in the nature of a partial liquidation, whether payable in cash or
in kind (but excluding the distribution of a cash dividend payable out of earned
surplus and designated as such) then in such event the exercise prices then in
effect with respect to each Stock Option shall be reduced, on the payment date
of such distribution, in proportion to the percentage reduction in the tangible
book value of the shares of the Corporation's Common Stock (determined in
accordance with generally accepted accounting principles) resulting by reason of
such distribution.
24. Options in Substitution for Stock Options Granted by Other Corporations.
Stock Options and related Stock Appreciation Rights may be granted
under the Plan from time to time in substitution for such options held by
employees of a corporation who become or are about to become employees of the
Corporation or a Subsidiary as the result of a merger or consolidation of the
employing corporation with the Corporation or a Subsidiary or the acquisition by
either of the foregoing of stock of the employing corporation as the result of
which it becomes a Subsidiary. The terms and conditions of the subsided Stock
Options and related Stock Appreciation Rights so granted may vary from the terms
and conditions set forth in this Plan to such extent as the Board at the time of
grant may deem appropriate to conform, in whole or in part, to the provisions of
the options in substitution for which they are granted.
25. Investment Intent.
The Corporation may require that there be presented to and filed with
it by any Participant under the Plan, such evidence as it may deem necessary to
establish that the Stock Options granted or the shares of Common Stock to be
purchased or transferred are being acquired for investment and not with a view
to their distribution.
26. No Right to Continue Employment.
Nothing in the Plan or the grant of any Stock Option and related Stock
Appreciation Rights confers upon any employee the right to continue in the
employ of the Corporation or interferes with or restricts in any way the right
of the Corporation to discharge any employee at any time (subject to any
contract rights of such employee).
27. Indemnification of Board and Committee.
No member of the Board of the Committee, nor any officer or employee of
the Corporation acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination or interpretation taken or made
in good faith with respect to the Plan, and all members of the Board or the
Committee and each and any officer or employee of the Corporation acting on
their behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Corporation in respect of any such action, determination or
interpretation.
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28. Tax and 1934 Act Requirements.
The employee receiving shares issued upon the grant or exercise of any
Stock Option or Stock Appreciation Right shall be required to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such shares of Common Stock. Such payments shall be
required to be made prior to or concurrent with the cash payment or delivery of
any certificate representing such shares of Common Stock. Such payments shall be
required to be made prior to or concurrent with the cash payment or delivery of
any certificate representing such shares of Common Stock. Such payment may be
made in cash, by check, or through the delivery of shares of Common Stock which
the employee owns or is entitled to receive after payment of the purchase price
(which may be effected by the actual delivery of shares of Common Stock by the
exercising employee or by the Corporation withholding a number of shares to be
issued upon the exercise of the Stock Option), which shares have an aggregate
fair market value equal to the required withholding payment, or any combination
thereof. If an exercising Participant who is an officer, director or 10%
shareholder of the Corporation (as determined by reference to Section 16(b)
under the 1934 Act and the rules promulgated thereunder) elects to have withheld
shares of Common Stock in an amount necessary to pay any such taxes, all
applicable provisions of Rule 16b-3 promulgated under Section 16(b) of the 1934
Act necessary to exempt such withholding of shares from the operation of Section
16(b) of the 1934 Act as a "purchase" or "sale" thereunder shall first be
satisfied.
29. Government Regulations.
Notwithstanding any of the provisions hereof, or of any written
agreements evidencing Stock Options or Stock Appreciation Rights granted
hereunder, the obligation of the Corporation to sell and deliver shares shall be
subject to all applicable laws, rules and regulations and to such approvals by
any government agencies or national securities exchanges as may be required. The
employee shall agree not to exercise any Stock Option or Stock Appreciation
Right, and the Corporation shall not be obligated to issue any shares, if the
exercise thereof or if the issuance of shares shall constitute a violation by
the employee or the Corporation of any provision of any law or regulation of any
governmental authority.
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EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Place of Percentage of Voting
Name of Subsidiary Organization Securities Owned
- ------------------ ------------ ----------------
First Financial Bankshares of Delaware 100%
Delaware, Inc.
First Financial Investments, Inc. Texas 100%
First National Bank of Abilene Texas 100%*
Abilene Texas
Hereford State Bank Texas 100%*
Hereford, Texas
First National Bank, Sweetwater Texas 100%*
Sweetwater, Texas
Eastland National Bank Texas 100%*
Eastland, Texas
The First National Bank in Cleburne Texas 100%*
Cleburne, Texas
Stephenville Bank & Trust Co. Texas 100%*
Stephenville, Texas
San Angelo National Bank Texas 100%*
San Angelo, Texas
Weatherford National Bank Texas 100%*
Weatherford, Texas
Texas National Bank Texas 100%*
Southlake, Texas
* By First Financial Bankshares of Delaware, Inc.
All subsidiaries (other than First Financial Investments, Inc. which, as of
December 31, 1998, had not yet been formally organized) are included in the
consolidated financial statements.